Key Points:
- RBI Rate Cuts expected as policymakers consider 25–50 bps reduction amid soft inflation and stable domestic demand.
- India’s economic growth remains steady, supported by festive spending, GST cuts, and rural consumption.
- Liquidity pressures and global trade uncertainties influence the central bank’s potential easing measures.
The Reserve Bank of India’s Monetary Policy Committee is expected to consider additional monetary easing when it meets on Dec. 6, as policymakers weigh soft inflation trends against emerging risks in trade and liquidity conditions. Economists expect a reduction of 25 to 50 basis points in the policy rate, supported by elevated real rates and a steady decline in price pressures.
Economic Outlook Remains Stable
India’s policy stance has already shifted this year through coordinated monetary and fiscal actions, including 100 basis points of repo rate cuts, cash reserve ratio reductions, open market operation purchases, and income tax and goods and services tax cuts. These moves helped cushion the economy from delays in the US trade deal and ongoing tariff pressures.
Despite these measures, policymakers now face a crucial stage. They are assessing whether the recent recovery will sustain and whether additional support is needed. A key area of uncertainty is the effect of elevated tariffs on external balances. India’s merchandise trade deficit widened to about $32 billion in September and expanded further to roughly $42 billion in October, driven partly by increased gold imports. Authorities have introduced trade relief measures to support exporters affected by US tariffs, but the full impact remains unclear.
Domestic Demand Trends Steady
Domestic demand has held firm despite external headwinds. Economic activity stabilised as inflation eased, borrowing costs declined, and government spending accelerated. Much of the rise in consumer spending came during the festival season as GST reductions lifted sentiment. Discretionary segments such as auto sales and white goods outperformed staples. Rural demand continued to exceed urban consumption, although recent signs point to a narrowing gap as urban demand improves, factors often considered when evaluating RBI rate cuts.
Analysts caution that these trends may be uneven. Government spending could pull back if tax collections stay weak. Urban demand may cool after the surge in the third quarter of FY26. Lower food prices may weaken farmer incomes, limiting the strength of rural consumption.
While real GDP growth remains solid, nominal GDP growth—below 10%—has raised concerns. Persistently low nominal growth could weigh on corporate revenues, tax receipts, and debt servicing capacity. This may heighten vulnerabilities in credit markets and weaken investor sentiment, particularly relevant to the discussion on RBI rate cuts.
Inflation Trajectory Supports Easing
India’s inflation outlook remains favourable. Good monsoons kept food inflation subdued, and GST-related price cuts contributed to a sharp fall in core-core inflation, which registered 2.6% in October. Recent data shows inflation running 80 to 100 basis points below the central bank’s forecast for the second half of FY26 and into FY27, strengthening arguments for RBI rate cuts.
Economists expect inflation to average about 2% in FY26 and 4.1% in FY27. Potential upward pressure on food prices may be offset by the Food Corporation of India’s high grain stocks. Soft global crude oil prices could also allow retail fuel price adjustments if required.
Given these conditions, analysts see room for a 25 to 50 basis point rate cut. They note that much of the recent economic momentum reflects festive demand and GST-related gains, raising questions about sustainability as RBI rate cuts discussions intensify.
A further reduction in rates would be supported by benign core inflation, spare capacity in the economy, and uncertainty surrounding global trade negotiations. The central bank recently signaled openness to additional easing in line with its October guidance, further fueling expectations of RBI rate cuts.
Liquidity Pressures Draw Attention
Liquidity conditions have tightened in recent weeks. The rupee came under pressure, prompting foreign exchange intervention that reduced system liquidity. Since mid-September, liquidity has fallen to 0.4 to 0.6% of net demand and time liabilities, below the central bank’s preferred 1% level. Earlier in the year, liquidity stayed above 2%, making liquidity management an important consideration for RBI rate cuts.
Economists expect the central bank to consider durable liquidity infusion of ₹1 trillion to ₹1.5 trillion in the remaining months of FY26. While some measures could precede the policy review, the December meeting may include an announcement of open market operation purchases as the effects of the cash reserve ratio cut become clearer. Such steps would help stabilise bond markets as demand-supply pressures ease, supporting the environment for potential RBI rate cuts.
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