The monetary policy review meeting of the Reserve Bank of India (RBI) next week comes at a time when inflation is at an all-time low and growth on a high trajectory path. As per the latest data, the real GDP of India, adjusted for inflation, is estimated to grow by 8.2 per cent in Q2 of FY 2025-26 against the growth rate of 5.6 per cent during Q2 of FY 2024-25.
Moreover, India’s inflation trajectory in October reflects a remarkable softening, underscoring the economy’s robust fundamentals and effective price management measures. Headline inflation, measured by the Consumer Price Index (CPI) eased to 0.25 per cent over the previous year, marking the lowest level recorded in the current CPI series.
According to economists on Saturday, it would be a close call on the repo rate at the upcoming RBI MPC. “Given that monetary policy is forward looking and inflation in Q4-FY26 and FY27 is likely to be in the 4 per cent plus region, yielding a real repo rate of 1-1.5 per cent, the policy rate appears to be at a fair level. Under these conditions we do not think that there should be any change in the policy rate,” said Madan Sabnavis, Chief Economist, Bank of Baroda.
However, as liquidity, though in surplus, is at the lower end of the 1 per cent of Net Demand and Time Liabilities (NDTL) mark, there could be a case for announcing some Open Market Operations (OMOs). “This will be helpful during December when the advance tax payments flow out of the system. On the forecasts side, we do expect downward revision in inflation forecast by 0.1-0.2 per cent and an upward revision in GDP forecast of 0.1-0.2 per cent for FY26,” Sabnavis added.
RBI Governor Sanjay Malhotra said earlier this week that there was headroom for a repo rate cut to spur growth at the next monetary policy review meeting in December due to favourable macroeconomic indicators. Malhotra also stated after the last monetary policy committee meeting in October that there was scope for a repo rate cut going ahead as inflation had declined, leaving space for the RBI to focus on growth.
He also said that the central bank has two mandates — to maintain price stability and maintain growth. “We don’t remain aggressive on growth, nor do we remain defensive,” Malhotra remarked. The monetary policy committee chaired by the RBI Governor had left the repo rate unchanged in the last two reviews, held in August and October, in order to keep inflation in check. Before that the RBI reduced the repo rate by 100 bps from 6.5 per cent to 5.5 per cent between February and June.
Morgan Stanley expects the RBI to reduce the repo rate by 25 basis points to 5.25 per cent. The report said the broader policy stance is likely to stay prudent, with the central bank poised to become data-dependent once this step is taken.
