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RBI Rate Cut Dilemma: Will Strong GDP Growth Delay Monetary Easing?

The RBI faces a crucial decision on whether to cut interest rates despite strong economic indicators. India's economy is showing remarkable strength with 8.2% GDP growth and record-low inflation of just 0.25%. Economists are divided on the outcome, with some arguing rates are already at fair levels while others see room for easing. The central bank must balance its dual mandate of maintaining price stability while supporting economic growth.

Key Points: RBI MPC Meeting Repo Rate Decision Amid Low Inflation Growth

  • India's GDP grows at 8.2% in Q2 FY25 against 5.6% previous year
  • Inflation hits record low 0.25% in October, showing economic stability
  • RBI Governor suggests headroom for rate cuts to spur economic growth
  • Economists expect downward inflation and upward GDP forecast revisions for FY26
3 min read

Will RBI slash repo rate amid robust GDP growth, all-time low inflation?

RBI faces rate cut decision as India's inflation hits record low 0.25% while GDP grows at 8.2%. Economists divided on December monetary policy outcome.

"Given that monetary policy is forward looking and inflation in Q4-FY26 and FY27 is likely to be in the 4 per cent plus region, yielding a real repo rate of 1-1.5 per cent, the policy rate appears to be at a fair level. - Madan Sabnavis, Bank of Baroda"

New Delhi, Nov 29

The monetary policy review meeting of the Reserve Bank of India (RBI) next week comes at a time when inflation is at an all-time low and growth on a high trajectory path.

As per the latest data, the real GDP of India, adjusted for inflation, is estimated to grow by 8.2 per cent in Q2 of FY 2025-26 against the growth rate of 5.6 per cent during Q2 of FY 2024-25.

Moreover, India's inflation trajectory in October reflects a remarkable softening, underscoring the economy's robust fundamentals and effective price management measures. Headline inflation, measured by the Consumer Price Index (CPI) eased to 0.25 per cent over the previous year, marking the lowest level recorded in the current CPI series.

According to economists on Saturday, it would be a close call on the repo rate at the upcoming RBI MPC.

"Given that monetary policy is forward looking and inflation in Q4-FY26 and FY27 is likely to be in the 4 per cent plus region, yielding a real repo rate of 1-1.5 per cent, the policy rate appears to be at a fair level. Under these conditions we do not think that there should be any change in the policy rate," said Madan Sabnavis, Chief Economist, Bank of Baroda.

However, as liquidity, though in surplus, is at the lower end of the 1 per cent of Net Demand and Time Liabilities (NDTL) mark, there could be a case for announcing some Open Market Operations (OMOs).

"This will be helpful during December when the advance tax payments flow out of the system. On the forecasts side, we do expect downward revision in inflation forecast by 0.1-0.2 per cent and an upward revision in GDP forecast of 0.1-0.2 per cent for FY26," Sabnavis added.

RBI Governor Sanjay Malhotra said earlier this week that there was headroom for a repo rate cut to spur growth at the next monetary policy review meeting in December due to favourable macroeconomic indicators. Malhotra also stated after the last monetary policy committee meeting in October that there was scope for a repo rate cut going ahead as inflation had declined, leaving space for the RBI to focus on growth.

He also said that the central bank has two mandates -- to maintain price stability and maintain growth. "We don't remain aggressive on growth, nor do we remain defensive," Malhotra remarked.

The monetary policy committee chaired by the RBI Governor had left the repo rate unchanged in the last two reviews, held in August and October, in order to keep inflation in check. Before that the RBI reduced the repo rate by 100 bps from 6.5 per cent to 5.5 per cent between February and June.

Morgan Stanley expects the RBI to reduce the repo rate by 25 basis points to 5.25 per cent. The report said the broader policy stance is likely to stay prudent, with the central bank poised to become data-dependent once this step is taken.

- IANS

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Reader Comments

R
Rohit P
I think RBI should maintain status quo. Why fix what's not broken? The economy is doing great with current rates. Better to be cautious than sorry later.
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Sarah B
As an NRI investor, I'm closely watching this decision. A rate cut could make Indian markets even more attractive for foreign investment. The 8.2% GDP growth is already impressive! 📈
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Arjun K
Governor Malhotra's balanced approach makes sense - "neither aggressive nor defensive" on growth. But common people like us need relief. Even a small 25 bps cut would help small businesses and home buyers.
M
Michael C
The forward-looking approach mentioned by Bank of Baroda economist seems prudent. While current numbers look good, we need to ensure inflation doesn't spike back up. Better to wait and watch for another quarter.
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Kavya N
With festival season over and advance tax payments coming in December, some liquidity support through OMOs would be very helpful for the market. Hope RBI considers this even if they don't cut rates. 🙏
V
Vikram M
Respectfully, I think the RBI has been too conservative lately. When we have such strong fundamentals, we should be more proactive in supporting growth. A 25-50 bps cut would really

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