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 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.
Post February policy, the new GDP series and new CPI series will be released, as well as the Q3 (October-December) GDP numbers.
“While Q3 GDP numbers could be even higher than Q2 GDP numbers, the new CPI series could strip off 20-30 basis points from headline numbers. The new GDP series — because of more formalisation of the economy that was not previously accounted for — could also move even higher,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
The ERD economists noted that the decisively low inflationary imprint at less than 4 per cent from February 2025 — and likely to continue for most of FY27 — put forth a perplexing dilemma, a kind of double whammy for the MPC (Monetary Policy Committee) right through its ensuing February meet as the tactical flexibility to take a considered view, balancing the risks evenly, gets squeezed further.
Missing the benefits of a pre-emptive action (August/October policy), the Inflation Targeting Framework thus could have achieved its mandate. But it was constrained to deliver such with the inflation forecast one year ahead (Q1FY27) being put at 4.9 per cent, only to be revised downwards later to 4.5 per cent in October policy.
“Given this backdrop, specifically, the RBI’s October decision to maintain status quo on policy rates now appears to have substantially narrowed its tactical flexibility.
“Interestingly, the Q1FY27 inflation forecast is currently trending at below 3 per cent as per SBI estimates. Subsequently, sporadic talks of rate hikes in future, hinged to likelihood of prices rising in a not-so-distant time do not factor in the veritable constraints of forecasting subjugated to host of uncertainties in a multi-polarised world,” Ghosh said.
“With inflation forecasting on a monthly basis remaining a difficult task, the audacity of long-term forecasting can only weaken the central bank’s communication with market forces, an agent holds utmost importance in these trying times, we believe,” he added.
“Under these circumstances, we believe December rate cut is a close call and not a given. It will entirely depend on how RBI is able to communicate to the market a rate cut when growth numbers are in excess of 7 per cent. Does the central bank talk about an aspirational growth rate?”
“It remains to be seen, but central bank communication could take interesting turn in December policy if RBI had to cut rates. Anyway, as an inflation-targeting central bank, the primary responsibility of RBI is to always cut rates first!” the ERD economists said.
Also, liquidity needs to be better calibrated going forward for smooth transition and transmission as credit demand looks set to trump deposit growth.
Published on November 13, 2025
