MPC will likely continue on an extended hiatus; further interest rate cuts depend on inflation trend: report

The Reserve Bank of India’s Monetary Policy Committee (MPC) is likely to take an extended policy pause after the recent rate cut, with further monetary easing conditional on inflation remaining consistently below current trajectory, ICICI Bank’s Economic Research Group has claimed, after analyzing the December monetary policy minutes.

“We expect MPC to take a longer pause. Any further easing is possible only if inflation is consistently below the current trajectory. In February, MPC aims to assess the impact of the new GDP and CPI series on the headline data,” the ICICI Bank report said.

The minutes of the December MPC meeting, released on Friday, indicated that inflation has become increasingly benign

“Further rate cuts from here are possible only if inflation remains well below expectations going forward. In terms of timing, the MPC is expected to maintain the status quo in February as it looks to assess the impact of the new series of GDP and CPI on headline figures. In the meantime, the RBI would continue to provide sufficient liquidity (OMO purchases/FX swaps) to ensure transmission to interest rates,” the ICICI Bank report said.

MPC members noted that further easing would only be considered if inflation rates remain persistently below projections. With headline inflation expected to hover around 4 percent in FY27, current real interest rates are already close to the lower end of the RBI’s estimated comfort band, limiting the scope for aggressive action. In the short term, the MPC is likely to maintain the status quo at its February policy meeting as it looks to assess the impact of the upcoming new GDP and CPI series on key macroeconomic indicators. MPC members emphasized the importance of recalibrating policy assessments once the revised statistical series are included in growth and inflation measures.

The minutes also reflect growing concerns about a moderation in growth momentum, especially in the second half of FY26. High-frequency indicators such as PMI, industrial production and export data point to some slowdown in economic activity, even as global and domestic growth outcomes have so far exceeded expectations. While favorable inflation, supported by a favorable outlook for food production and subdued global oil prices, was the main driver of the recent interest rate cut, some outside members warned that prolonged low inflation could hurt profit margins and investment decisions, especially for smaller companies. MPC members stressed, as reflected in the minutes, that future policy measures must be carefully balanced between supporting growth and maintaining macroeconomic stability.

Overall, the MPC’s position signals a shift towards data-dependent policymaking, with liquidity measures expected to continue to support transmission even as interest rates are likely to remain unchanged in the coming months unless inflation dynamics change substantially.

In line with expectations, the Monetary Policy Committee (MPC) cut the policy rate by 25 basis points (bps) at its December meeting. It maintained its neutral policy position. RBI Governor Sanjay Malhotra characterized India’s current macroeconomic moment as a “rare Goldilocks period,” currently marking high economic growth and exceptionally low inflation.

GDP growth rose to a six-quarter high of 8.2 percent annualized in the second quarter of fiscal 2026 from 7.8 percent in the previous quarter, fueled by robust consumption and helped by the rationalization of GST rates from September 2025. Nominal GDP growth slowed to 8.7 percent from 8.8 percent.

Taking all factors into account, the RBI raised its full-year GDP growth forecast to 7.3 percent, an increase of half a percentage point. The RBI revised its CPI inflation forecast for 2025-26 to just 2.0 percent, down from previous estimates of 2.6 percent.

Published on December 21, 2025