MPC meeting: RBI could cut repo rate by 25 bps in December meeting, say economists

India’s next monetary policy decision has attracted significant attention, with recent polls by Reuters and Informist showing a clear division among economists on the Reserve Bank of India’s next move on interest rates. Strong GDP growth and low inflation have made the outlook uncertain ahead of the Monetary Policy Committee meeting on December 5. The pace of economic growth and record-low inflation have created a complex scenario for policymakers.

A Reuters poll conducted before the release of September quarter GDP data showed that most economists expected a 25 basis point cut in the policy repo rate to 5.25 percent at the December meeting, followed by a pause until 2026. Likewise, an Informist poll showed that 17 out of 20 economists surveyed expected a cut in the repo rate at the end of the three-day meeting. Sixteen expected a cut of 25 basis points, while India Ratings and Research expected a cut of 25-50 basis points.

The Indian economy grew by 8.2 per cent in the July-September quarter, well above expectations, prompting some analysts to raise their full-year growth forecasts to above 7 per cent. This growth is close to India’s estimated potential of 6.5 to 7 percent, which is considered the maximum sustainable rate without causing inflation. The Reserve Bank of India expects GDP growth of 6.8 per cent for fiscal 2026, slowing to 6.4 per cent in the December quarter and 6.2 per cent in the March quarter.

India’s retail inflation rate fell to a record low of 0.25 per cent in October and is expected to remain low in the coming months. At this inflation level, the neutral real rate—the repo rate minus inflation—remains high but is expected to fall on a forward inflation basis. The Reserve Bank of India expects inflation to reach 4.5 percent during the first quarter of fiscal year 2027, and the neutral real rate is estimated to range between 1.4 and 1.9 percent.

Barclays noted that growth has peaked and expects the second half of FY26 (October to March) to see lower growth than the first half (April to September). This view is consistent with the Reserve Bank of India’s forecast of slower growth as FY26 progresses.

Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said the RBI’s policy decision in December will be difficult due to resilient growth and very low inflation. Gupta added that the RBI is likely to maintain its current stance as there is limited scope for easing, which should be used only if growth risks worsen.

The September quarter GDP data is a key factor in the Monetary Policy Committee’s decision, with some economists revising their interest rate forecasts based on the latest figures. Barclays noted that strong GDP makes a rate cut unlikely at the next meeting.

Proponents of interest rate cuts argue that real interest rates should be adjusted to reflect lower inflation expectations. Inflation fell more than expected and remains benign, so a 25 basis points rate cut is likely to bring the real interest rate in line with inflation expectations, said A Prasanna, chief economist at ICICI Securities Dealership.

Since early 2025, the MPC has lowered the repo rate by 100 basis points: 25 in February, 25 in April, and 50 in June. The rate has remained constant at 5.50 percent since June, with a neutral policy. Most economists expect interest rates to remain unchanged after December, although some see the possibility of further easing in February if inflation remains below the Reserve Bank of India’s 4 percent target.

External factors, including the 50% tariff imposed by the United States on Indian imports, have only made matters more complicated.

(With agency input)