RBI Rate Cut in December? Emkay Says Inflation Shock Makes It Hard to Wait

As the Reserve Bank of India’s Monetary Policy Committee (MPC) heads into its December meeting, Emkay Research believes the central bank faces a “close call” but is still likely to opt for a 25 bps rate cut, supported by softer inflation readings and a weakening growth impulse. The firm highlights that both the RBI and markets have “repeatedly misread the macro cycle on the inflation and growth fronts,” resulting in unreliable forecasts and delayed policy responses. Inflation Has Reset Lower, Strengthening Case for a Cut Emkay notes that CPI inflation has persistently surprised to the downside for several months, even after accounting for noisy components like gold. The brokerage expects inflation to undershoot the RBI’s projections materially in the second half of FY26. “The RBI has repeatedly slashed its FY26 inflation projections since Apr-25, and the Dec-25 policy will likely mark a fifth revision of 50–60bps (RBI: 2.6% vs. Emkay: 1.92%),” the report states. Advertisement It adds that its 2HFY26 inflation estimate is tracking nearly 130 basis points below the RBI’s, reflecting a structural downward reset. Emkay argues that in such an environment, “anchoring policy to a 1-year-ahead projection (RBI’s 1QFY27 estimate at 4.5%) seems increasingly misplaced.” With Asia’s inflation environment trending toward disinflation, the RBI “will find it harder to overlook its core mandate.” Advertisement Growth Momentum Appears Strong but Uneven India’s robust 8.2% GDP growth in Q2 was largely driven by favourable statistical effects, improved real purchasing power and lagged regulatory easing. However, underlying growth remains mixed. “The 8.2% 2Q GDP growth surprise was a disproportionate blend of statistical anomalies (favourable deflator effects)… alongside lagged easing,” the report notes. Emkay expects RBI to peg FY26 growth near 7%, compared with its own estimate of 7.3%, but warns that nominal GDP may fall below 8%. A low nominal GDP trajectory could force sharper fiscal consolidation to maintain debt-to-GDP metrics and impact variables like credit demand and earnings. Rupee Weakness Should Be Seen as a Stabilizer, Not a Deterrent With the rupee emerging as the worst-performing EM Asia currency so far in FY26, market commentators have raised concerns that rate cuts could worsen pressure on the exchange rate. Emkay disagrees. “India’s relative loss of export competitiveness vs EM Asia amid higher tariffs… would warrant some adjustment via a weaker currency,” the report says. This depreciation should be viewed as “a natural stabilizer for a weaker CAD, rather than being misread as a rate-easing deterrent.” Liquidity Is Becoming a Bigger Concern Than Rates Banking system liquidity has tightened significantly since September, primarily due to unsterilized foreign exchange intervention by the RBI. Emkay warns that liquidity could fall to 0.2–0.3% of NDTL by March 2026 without fresh infusion. “Our liquidity model indicates that additional primary injections—mainly via OMOs, of ~Rs2trn over the rest of FY26 will be required to keep liquidity near 1% of NDTL,” the report states. Reserve money growth has slowed, and the RBI’s balance sheet has expanded only 4.4% in FYTD26, with FX losses offsetting gains since January. The report argues that while the debate on rate cuts continues, liquidity support may be even more crucial to ensure smoother transmission and reduce the steep yield curve. Communication Will Be Key as MPC Votes May Split Emkay expects the MPC decision to be split, reflecting divergent views on inflation persistence, growth momentum, and external risks. However, clear forward guidance will be essential to maintain market confidence. “Forward guidance/communication to be crucial,” the report highlights in its key takeaways. Read More - Who Is Amar Subramanya? Apple’s New VP of AI Replacing John Giannandrea The brokerage reiterates that the case for easing in December is strong, given: sharply undershooting inflation, noisy near-term GDP prints,