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 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.
After the February policy, the new GDP series and new CPI series will be released, as well as the GDP figures for the third quarter (October-December).
“While the third quarter GDP figures could be even higher than the second quarter GDP figures, the new CPI range could subtract 20 to 30 basis points from the nominal figures. The new GDP range – due to more formalization of the economy that was previously not taken into account – could also move higher,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
The ERD economists noted that decisively low inflation pressures of less than 4 percent from February 2025 – and likely to persist for most of FY27 – posed a perplexing dilemma, a double blow of sorts for the MPC (Monetary Policy Committee) during its subsequent February meeting, as its tactical flexibility to take an informed position and evenly weigh risks comes under further pressure.
Therefore, having missed the benefits of a preventive action (August/October policy), the Inflation Targeting Framework could have fulfilled its mandate. But this could not be achieved as the inflation forecast a year ahead (Q1FY27) was set at 4.9 percent, only to be revised down to 4.5 percent later in the October policy.
“Specifically against this backdrop, the RBI’s decision in October to maintain the status quo on policy rates appears to have significantly limited its tactical flexibility.
“Interestingly, the inflation forecast for Q1’27 as per SBI estimates is currently below 3 per cent. Subsequently, sporadic talk of rate hikes in the future, which is linked to the likelihood of prices rising in a not so distant time, does not take into account the real limitations of forecasts which are subject to a host of uncertainties in a multi-polarized world,” Ghosh said.
“As predicting inflation on a monthly basis remains a difficult task, the boldness of long-term forecasts can only weaken the central bank’s communication with market forces. An agent, in our view, is of paramount importance in these difficult times,” he added.
“Under these circumstances, we believe that the December rate cut is timely and not a given. It will entirely depend on how the RBI is able to communicate a rate cut to the market when growth rates are above 7 percent. Is the central bank talking about an ambitious growth rate?”
“It remains to be seen, but the central bank’s communication could take an interesting turn in the December policy if the RBI were to cut rates. In any case, as an inflation-targeting central bank, the RBI’s primary responsibility is always to cut rates first!” said the ERD economists.
Liquidity also needs to be better calibrated going forward for smooth transition and transmission, as credit demand appears to be outpacing deposit growth.
Published on November 13, 2025
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