Mixed signals ahead of monetary policy: Kotak Mahindra AMC sees a 50% probability of a 25 bps rate cut

The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) is set to announce its policy decision on December 5, 2025. The repo rate currently stands at 5.50 percent, with the policy stance described as “neutral.” The last MPC meeting in October 2025 signalled a dovish tone, supported by the Governor’s indication of GDP growth being below aspirational levels and room for a rate cut.
However, recent GDP data has shifted market dynamics. Q2FY26 GDP growth surged to 8.2 percent, exceeding both RBI’s projection of 7 percent and the market’s median forecast of 7.3 percent. This robust performance was driven by private consumption growth at 7.9 percent (vs. 7 percent in Q1FY26) and a favourable base effect.
In contrast, nominal GDP growth remained subdued at 8.7 percent (8.8 percent in Q1FY26), reflecting a lower deflator as it is calculated at current market prices. Despite strong growth, uncertainty around the India-US trade deal remains a downside risk. Given these factors, we expect the RBI to revise its FY26 GDP growth forecast above 6.8 percent.
On the inflation front, headline inflation plunged to 0.25 percent in October 2025 from 1.44 percent in September. Food inflation also fell sharply to -5.02 percent in October from -2.33 percent in September, remaining negative since June 2025. This decline was driven by reduced GST rates, a favourable base effect, and a steep drop in vegetable prices (-27.57 percent in October).
Core inflation stood at 4.4 percent, supported by elevated gold prices. Inflation remains well within the RBI’s medium-term target of 4 percent. Consequently, we expect the RBI to lower its FY26 inflation forecast below 2.6 percent and revise its Q1FY27 projection below 4.5 percent.
Liquidity conditions have turned comfortable, with the banking system in surplus after a 100 bps CRR cut implemented in four tranches ending November 2025. Durable liquidity injections through OMOs, FX swaps, and VRR auctions earlier in the year further eased funding conditions. System liquidity, which was in deficit during late 2024 and early 2025, turned positive by mid-2025 and remains supportive of monetary transmission. As of November 30, 2025, surplus liquidity stands at Rs 1.45 lakh crore, while forex reserves of $688 billion provide external stability.
While strong GDP growth argues against a rate cut, persistently low inflation supports the case for easing. On one hand, steeper sovereign yield curve is somewhat pricing in much tighter monetary policy sooner than later, on the other hand corporate bond spreads are indicating no such robust GDP growth ahead.
Overall, market expectations remain divided, with global factors adding complexity—the Federal Reserve has cut rates twice this year and is expected to deliver another 25 bps cut on December 10, 2025, while the rupee has depreciated over 5 percent year-to-date to hit all-time low of 90.3 against the US dollar.
Progress toward finalizing the first phase of the India-US trade deal by year-end adds to external stability. We assign a 50 percent probability of a 25 bps rate cut, with the policy stance likely to remain neutral.
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