The higher growth numbers for Q2 (July-September) and the October inflation print will pose a serious dilemma for the RBI for a rate action in December, according to State Bank of India’s economic research department (ERD).
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ALTAF HUSSAIN
Firm growth and inflation undershoot makes the rate-setting monetary policy committee’s December rate decision a close call, say economists.
CPI inflation reading came it at a record low of 0.25 per cent for October even as GDP growth is expected to hold up at about 7.5 per cent in the second quarter.
The higher growth numbers for Q2 (July-September) and the October inflation print will pose a serious dilemma for the RBI for a rate action in December, according to State Bank of India’s economic research department (ERD).
The ERD has estimated real GDP to expand by 7.5 per cent in Q2 FY26. The CPI (retail) inflation moderated to an all-time low of 0.25 per cent year-on-year(y-o-y) in October 2025, helped by decline in food & beverages inflation as prices of vegetables, pulses and spices continue to decline while fruits inflation and oil & fat inflation moderated.
“Even for the February 2026 policy, there are many moving parts. For example, the full year GDP forecast for FY26 could be well over 7 per cent. The inflation prints for November and December (both months at below 1 per cent) will continue to pose the same (if not more) dilemma in February policy,” opined the ERD economists.
Radhika Rao, Senior Economist, DBS Group Research, opined that the MPC is likely to lower its inflation forecast (of 2.6 per cent for FY26) sharply at the December’s rate review, while nudging up FY26 growth numbers (of 6.8 per cent).
She expects the October-December 2025 inflation to average 0.6 per cent compared to RBI’s estimate at 1.8 per cent and a sub- 3 per cent print in January-March 2026 vs RBI’s 4 per cent projection. This paves the way for at least 50-60 basis points (bps) reduction in the FY26 annual (inflation) forecast.
Further, based on the Q2FY26 growth numbers that will be out in late-November, the full-year growth might be revised up marginally. Passage of a US-India trade deal before the December rate review, will also be an important input for policymakers.
Rate reductions
To make a case for rate reductions despite strong growth numbers, Rao observed that the MPC will likely highlight risks to the forward-looking growth trajectory, with prevailing low inflation providing them with the necessary room to reduce lower rates.
“While a cut is not a foregone conclusion, we see a more than even chance of a reduction in December – the last in the current cycle,” she said.
Yes Bank’s Indranil Pan (Chief Economist) and Khushi Vakharia (Economist), observed that factoring the GST cut impacts, their model now predicts Headline CPI at 1.8 per cent for FY26 and 3.5 per cent for FY27.
“We think that the RBI would want to watch through the low inflation print, driven by vegetables, similarly when RBI watched through higher prints on account of higher vegetable inflation.
“Minutes from last meeting also clearly establish that inflation should not be the only guiding factor. Therefore, unless growth falters, we do not see RBI restarting the rate cutting cycle,” they said.
Kaushik Das, Chief Economist – India, Malaysia, and South Asia at Deutsche Bank AG, forecast India’s FY26 CPI inflation to moderate to 2 per cent y-o-y (RBI estimate currently at 2.6 per cent), from 4.6 per cent in FY25, thereafter rising to 4.3 per cent yoy average in FY27 (RBI’s forecast: 4.5 per cent y-o-y).
“While we have revised up our FY26 real GDP growth to 7.0 per cent y-o-y (RBI at 6.8 per cent y-o-y), we have also revised down our nominal GDP growth estimate to 8.5 per cent y-o-y, implying a GDP deflator of 1.5 per cent (vs. 2.8 per cent in FY25 and 6.7 per cent in FY24).
“This would be the lowest nominal GDP growth post Covid-19 pandemic, with a steady fall recorded in each successive year,” he said.
Das expects the RBI to deliver a 25 bps repo rate cutin the December policy.Based on Deutsche Bank’s forecast of FY27 growth, inflation and real rates, a simple Taylor Rule formula indicates that the terminal repo rate could fall to 5.25 per cent, from 5.50 per cent currently.
“In FY27, if CPI inflation averages 4.2-4.3 per cent, then real rates will remain positive by about 100 bps, assuming a terminal repo rate of 5.25 per cent, which is sufficient to maintain macro financial stability, in our view,” he said.
Published on November 13, 2025
