RBI faces a delicate balancing act in upcoming policy amid record-low inflation and surging GDP growth

The Reserve Bank of India (RBI) is poised for a delicate decision in its upcoming Monetary Policy Committee (MPC) meeting scheduled from December 3-5, 2025, with the policy outcome to be announced on December 5. The central bank faces a nuanced economic landscape, characterised by subdued inflationary pressures alongside surprisingly robust GDP growth.

Recent data indicate that retail inflation, measured by the consumer price index (CPI), has stayed below the government-mandated lower band of 2% for two consecutive months, touching a record low of 0.25% in October 2025. This historic drop has been largely driven by significant declines in food prices and tax reductions on consumer goods, as well as subdued fuel inflation. While core inflation excluding food and energy remains somewhat elevated, hovering around 4.4%, the overall inflation outlook is benign compared to the RBI’s target band of 2-6%. Economists such as Dharmakirti Joshi, Chief Economist at Crisil, see this scenario as opening the door for a potential 25 basis point cut in the benchmark lending rate, a move that could further bolster economic activity.

However, the RBI’s decision is far from straightforward. The country’s GDP growth has shocked analysts with a robust expansion of 8.2% in the second quarter of FY26, outpacing earlier projections and raising concerns about overheating the economy. This growth acceleration is attributed to factors including sustained fiscal consolidation, targeted public investments, tax reforms such as GST rate cuts, and supportive monetary policy measures implemented over the past year. The central bank had already eased rates by a cumulative 100 basis points starting February 2024, stabilising the repo rate at 5.5% in August before pausing to gauge economic response.

Experts are divided on whether the RBI will pursue a rate cut or maintain status quo. Madan Sabnavis, Chief Economist at Bank of Baroda, highlights that with future inflation expected to stabilise around 4% or slightly above in FY27, the current policy rate provides a fair real interest rate of approximately 1-1.5%. Under these conditions, Sabnavis advises caution, suggesting the repo rate should remain unchanged. Similarly, Aditi Nayar, Chief Economist at ICRA, points to the strong GDP numbers as a compelling argument against an immediate rate reduction despite record-low CPI figures.

On the other hand, some see room for easing to maintain momentum, especially since the housing and allied sectors, as well as broader economic segments, have benefited from prior rate cuts and GST rationalisation. Ashok Kapur, Chairman of Krishna Group and Krisumi Corporation, argues that a further reduction would strengthen growth in the current favourable inflation environment.

Additional considerations come from financial market perspectives. Mandar Pitale, Head of Financial Markets at SBM Bank (India), emphasises the need to attract interest rate-sensitive capital flows to support the balance of payments while avoiding pressures on the banking sector’s resource mobilisation. This market sensitivity may influence the RBI’s decision to pause rather than cut rates, as maintaining attractive deposit rates is crucial for financial stability.

The RBI’s cautious stance is also reflected in past policy behaviour. Earlier in 2025, the central bank cautiously lowered the repo rate by 25 basis points amid moderating growth and inflation in February, while maintaining a neutral outlook. The fiscal year 2025-26 has been marked by policy efforts combining domestic tax cuts with monetary easing to enhance private investment and counter global economic headwinds, according to the RBI’s own monthly bulletins.

In summary, the upcoming RBI MPC meeting is a finely balanced call. The subdued inflation environment supports the case for a 25 basis point reduction in the benchmark lending rate, potentially signalling a continuation of the easing cycle that began last year. Yet, the unexpectedly strong GDP growth, combined with concerns about capital flows and the need for a cautious forward-looking monetary policy, suggests the central bank may opt for a neutral stance, holding rates steady for now.

Market watchers will be closely analysing the RBI’s guidance for hints on future policy trajectory, liquidity management, and measures to sustain growth without triggering inflationary pressures. The decision will reflect not just current economic readings but also a strategic judgement on keeping the economy on a stable path amid evolving domestic and global conditions.