RBI MPC faces tough call on rate cut decision

Amid the falling rupee and contradictory economic data, the task of the Reserve Bank of India’s Monetary policy Committee (MPC) seems to have become more difficult. Although retail inflation was at an unprecedented low, and the economy grew at a higher-than-expected rate (8.2%) in the second quarter of the fiscal year, the most recent high-frequency data for October shows a more realistic trend. Meanwhile, the rupee has fallen to a record low and is close to Rs 90 against the US dollar, making it a more difficult task for the Monetary Policy Committee.

Most analysts and experts are of the opinion that the Monetary Policy Committee, headed by RBI Governor Sanjay Malhotra, is likely to go for another 25 basis point interest rate cut this fiscal year, but whether that will happen remains to be seen in the next policy review.

The six-member Monetary Policy Committee is scheduled to meet from December 3 to 5 to decide on key interest rates and assess the current economic situation. The Reserve Bank of India has already cut interest rates by 100 basis points this fiscal year but has left them unchanged since the Monetary Policy Committee meeting in August.

“This will be a sustained policy for the RBI. This policy could go either way. There are enough reasons to believe that a rate cut is warranted – especially since the headline CPI is at sub-2% levels and is likely to remain so in the next three to four months. Growth, on the other hand, was surprising on the higher side with Q2FY26 standing at 8.2%, while high-frequency data for October suggests continued expansion in both manufacturing and services, supported by GST,” said a report by the RBI. Economists at Yes Bank, Indranil Pan and Khushi Vakharia, said, “Cutbacks, monetary policy easing, festive demand, etc. However, some of the recently announced print data, such as the manufacturing PMI and IIP, are on the lower side.”

While growth could face headwinds in the coming quarters as festive demand erodes and as hub capex declines, inflation in the retail sector is expected to rise on the back of base effects. “Our view: The RBI should remain on pause and maintain its ‘neutral’ stance to retain its strength in the event of any downturn in growth,” the report said.

Bank of Baroda also expects the RBI’s Monetary Policy Committee to keep the repo rate unchanged at 5.50% and maintain a neutral stance in its December 2025 meeting. “Strong GDP growth and easing inflation give the RBI room to pause interest rates while monitoring global uncertainty,” said Aditi Gupta, economist at Bank of Baroda.

The case for a December rate cut is stronger, but a split in the Monetary Policy Committee cannot be ruled out, a report by Emkay Global Financial Services said. “A decision is near, but the RBI is likely to ease by 25 basis points as MPC votes are split,” said the report by Emkay economists Madhavi Arora and Harshal Patel.

Inflation in the second half of the current fiscal is expected to track around 130 basis points lower than RBI estimates, and an initial liquidity infusion of Rs 2 lakh crore is needed in the rest of FY26, he said.

“Inflation has consistently surprised to the downside – even with noisy components like gold – while growth has consistently outperformed almost all expectations, led by a combination of cyclical forces and statistical quirks. With FY26 inflation approaching 2% and growth potential at around 7.5%, the policy challenge facing the RBI is two-pronged: clear in direction (the scope for easing is clear), but tactically complex (timing a move without misreading the cycle). The RBI’s recent communications have turned a corner,” the report said. “They have become significantly softer, and although the extent of the reduction is now publicly acknowledged, the timing and future outreach remain controversial.”

Retail inflation in October fell to a low of 0.25%, well below the RBI’s tolerance band of 2% to 6%. Although second-quarter GDP growth was strong, and full fiscal growth is now estimated to be above 7%, concerns have emerged about October’s high-frequency data. Industrial production fell to a 14-month low of 0.4% in October from 4.6% in September, while the HSBC India Manufacturing PMI fell to a nine-month low of 56.6 in November from 59.2 in October.

There also remain concerns about the impact of the 50% tariffs imposed by the US on Indian exports and a possible slowdown in the second half of the fiscal.