Higher growth in the second quarter and record-low inflation in October could pose a serious dilemma for RBI rate hikes in December, economists say

The higher growth rates for the second quarter (July-September) and October’s inflation figures will pose a serious dilemma for the RBI in a rate action in December, according to the Economic Research Department (ERD) of the State Bank of India. | Photo credit: ALTAF HUSSAIN

CPI inflation settled at a record low of 0.25 percent for October, while GDP growth is expected to remain at around 7.5 percent in the second quarter.

The higher growth rates for the second quarter (July-September) and October’s inflation figures will pose a serious dilemma for the RBI in a rate action in December, according to the Economic Research Department (ERD) of the State Bank of India.

The ERD estimates that real GDP will grow by 7.5 percent in the second quarter of FY26. CPI (retail) inflation fell to an all-time low of 0.25 percent year-on-year (yoy) in October 2025, helped by a decline in food and beverage inflation as prices of vegetables, pulses and spices continue to fall, while fruit inflation and oil and fat inflation moderated.

“Even for February 2026 policy, there are a lot of moving parts. For example, the full-year GDP forecast for FY26 could be well above 7 percent. Inflation rates for November and December (both months below 1 percent) will continue to pose the same (if not more) dilemma in February policy,” ERD economists said.

Radhika Rao, Senior Economist at DBS Group Research, opined that the MPC is likely to sharply cut its inflation forecast (from 2.6 per cent for FY26) at the December rate review, while growth rates for FY26 (from 6.8 per cent) will go up.

She expects inflation to average 0.6 percent between October and December 2025, compared to the RBI estimate of 1.8 percent and a decline of less than 3 percent in January-March 2026 versus the RBI projection of 4 percent. This paves the way for a reduction in the annual (inflation) forecast for FY26 by at least 50-60 basis points (bps).

Furthermore, based on Q2 26 growth figures to be announced at the end of November, full-year growth could be revised marginally upwards. Concluding a US-India trade deal before the December interest rate review will also be an important input for policymakers.

Rate reductions

Making a case for rate cuts despite strong growth rates, Rao noted that the MPC is likely to highlight the risks to the forward-looking growth trajectory, with prevailing low inflation giving them the necessary headroom to cut lower rates.

“While a cut is not a foregone conclusion, we see a better than even chance of a cut in December – the last in the current cycle,” she said.

Indranil Pan (Chief Economist) and Khushi Vakharia (Economist) of Yes Bank noted that taking into account the impact of the GST cut, their model now forecasts the Headline CPI at 1.8 percent for FY26 and 3.5 percent for FY27.

“We think the RBI would want to keep an eye on low inflationary pressures driven by vegetables, just as the RBI would like to see higher pressures due to higher vegetable inflation.

“It is also clear from the minutes of the previous meeting that inflation should not be the sole guiding factor. Therefore, unless growth falters, we do not see the RBI restarting the rate cutting cycle,” they said.

Kaushik Das, chief economist for India, Malaysia and South Asia at Deutsche Bank AG, forecasts India’s CPI inflation to moderate to 2 percent YoY for FY26 (RBI estimate currently 2.6 percent), from 4.6 percent in FY25, then rising to an average of 4.3 percent YoY in FY27 (RBI’s forecast: 4.5 percent YoY).

“While we have revised up our real GDP growth for FY26 to 7.0 per cent YoY (RBI 6.8 per cent YoY), we have also revised down our nominal GDP growth estimate to 8.5 per cent YoY, implying a GDP deflator of 1.5 per cent (versus 2.8 per cent in FY25 and 6.7 per cent in FY24).

“This would be the lowest nominal GDP growth after the Covid-19 pandemic, with a steady decline in each consecutive year,” he said.

Das expects the RBI to implement a repo rate cut of 25 basis pointsin the December policy.Based on Deutsche Bank’s forecast of growth, inflation and real interest rates for FY27, a simple Taylor Rule formula indicates that the terminal repo rate could fall to 5.25 percent from 5.50 percent currently.

“In FY27, when CPI inflation averages 4.2-4.3 percent, real interest rates will remain positive by around 100 basis points, assuming a terminal repo rate of 5.25 percent, which we believe is sufficient to maintain macro-financial stability,” he said.

Published on November 13, 2025