Why is rate cut a tough call for RBI? Six factors to track in the December MPC meeting

While every monetary policy is typically assessed through five key factors, this time the backdrop is notably different with six key factors as macroeconomic conditions have strengthened on the GDP growth and inflation fronts, making a rate-cut call more challenging. Instead, the depreciation of the Indian rupee and the Reserve Bank of India’s commentary on currency movements are expected to command greater focus in the upcoming policy deliberations.
A Moneycontrol poll of economists, treasury heads and fund managers said that the RBI’s MPC is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy due to the comfort provided by the lowest ever Consumer Price Index (CPI) inflation in the last two months.
Is rate cut a tough call?
The Reserve Bank of India’s final repo rate decision of the year is shaping up to be one of its most challenging, as the Monetary Policy Committee balances mixed macro signals with record-low inflation and robust GDP growth on one side, and a sharply weakening rupee on the other. The policy outcome is expected to reflect this delicate trade-off between domestic growth stability and external sector pressures.
On November 28, Moneycontrol reported that India’s bond market is seeing a sharp divergence in strategy, with investors and issuers spilt over the likelihood of a rate cut by the RBI in the December policy review.
Is revision in GDP expected?
The recent improvement in growth has been driven by a combination of supportive factors, including strong agricultural activity, a lower income tax burden following the previous Budget, rationalised GST rates, earlier policy rate cuts by the RBI, an early festive-season boost to consumption and a surge in front-loaded exports. In addition, headline GDP growth has also received a statistical lift from the low base of the previous year and an unusually subdued GDP deflator during this period.
While GDP growth averaged a robust 8 percent in the first half of the fiscal year, it is expected to moderate to around 7 percent in the second half as the export impetus fades and post-festival consumption normalises.
By the fourth quarter of FY26, the beneficial impact of the low base is likely to wane, while the GDP deflator is also expected to firm up from currently depressed levels. For the full year FY26, overall economic growth is projected at a still healthy 7.5 percent, CareEdge said in a report.
Nominal growth was slower at 8.7 percent--a four quarter low--compared with 8.8 percent in the previous quarter, a phenomenon that economists note can have implications for financial performance.
CPI Inflation
Most economists and experts are of the view that the central bank will revise down the projections on the CPI inflation in the December policy taking comfort from the lower outlook in the last two months.
India’s retail inflation eased sharply to 0.25 percent in October, its lowest level in the current series that began in 2013, down from 1.44 percent in September.
The moderation was led by a continued decline in food prices, with the food index falling to -5.02 percent in October from -2.3 percent in the previous month, reflecting a broad-based softening in key staples and edible items.
Liquidity Measures
Experts are of the view that the central bank will announce some measures on the liquidity front such as Open Market Operations (OMO) purchases to support banking system liquidity during time when the activity in the forex intervention has increased after rupee crossed 90-mark.
On December 4, Moneycontrol reported that as the defence of the Indian rupee intensifies through sustained intervention by the Reserve Bank of India (RBI), liquidity conditions in the domestic banking system have come under strain. With dollar sales tightening rupee liquidity, the bond market is increasingly pricing in the possibility of an Open Market Operation (OMO) purchase of government securities in the December monetary policy review to ease system-level liquidity stress. Please hyperlink the story
Banks' Expectations
In their second-quarter earnings commentaries, several bankers had expressed confidence that NIMs would stabilise in the third quarter of the current financial year. This optimism was largely based on the earlier assumption that there would be no immediate rate cut by the RBI.
Market participants cautioned that such a move could put pressure on banks’ net interest margins (NIMs), especially as deposit costs remain sticky.
Treasury heads noted that lenders may find it challenging to pass on the full benefit of lower rates without hurting profitability, even as borrowers stand to gain from cheaper credit in the near term.
Is rupee depreciation a concern?
Yes. Experts said that the sharp depreciation of the Indian rupee in last few days due to global uncertainties, is likely to be under spotlight during the monetary policy announcement and the commentary from the central bank on this will be crucial to watch out for.
On December 3, Moneycontrol reported that even as the Indian rupee touched a new record low and crossed a psychological level of 90 against the US dollar, the Reserve Bank of India (RBI) is seen absent in the market with just limited intervention at certain levels. Please hyperlink the story
Currency experts expect that the limited intervention is suggesting a potential surprise in the upcoming monetary policy. It may even be a significant announcement or commentary from the central bank in the December policy announcement.