Inflation makes case for rate cut, but growth indicators are benign

Mumbai: Odds have shortened on further easing in policy rates by the Reserve Bank of India (RBI) after the retail pricing gauge plunged to an eight-year-low of 1.54% last month, although lack of clarity on growth and trade has kept economists guessing on the timing of such rate action.

"Growth is a more important determinant for further easing and external headwinds are likely to drive Monetary Policy Committee decision making here," said Sameer Narang, head-economic research group, ICICI Bank. "As of now domestic growth indicators are showing expansion. However, a slowdown in exports implies the RBI may cut rates by 25 bps in December."

One basis point is a hundredth of a percentage point. Consumer Price Index-based (CPI) inflation for FY26 is expected to be lower than the RBI's estimate of 2.6%. This indicates space for easing,with economists estimating rate cuts in the range of 25-50 bps, although the decision will be influenced by the growth dynamics. On this count, there are two important indicators to watch out: whether 50% tariffs remain, and the impact of GST rate cuts on expansion in local consumption.

Economists at HSBC India believe that if the 50% tariff sticks until the year end, the RBI will cut rates by 25 bps in December.

The RBI's MPC will next meet in the first week of December. The central bank has eased policy repo rate by a total of 100 bps to 5.5%. A Tightrope Walk
Madhavankutty G, chief economist, Canara Bank, said that second-quarter growth should exceed the 7% threshold, going by high frequency indicators and facilitated by favourable base effects. "This obviates any need to cut rates from a growth perspective," he said.

GDP print for the June quarter stood at 7.8%. The RBI has estimated FY26 GDP growth at 6.8%.

On the other hand, Soumya Kanti Ghosh, SBI's group chief economic adviser, expects CPI to print at 0.45% for October, making a strong case for decisive action. "It would be better to err on rate cut front (Type I error) than to err on the side of caution, languishing far behind the curve as markets seem to be quite uncertain about reading the Mint street's mind," Ghosh said.

Indranil Pan, chief economist, Yes Bank, said that advance indicators have shown no clear signs of India slowing from the imposition of tariffs, but there is a clear understanding that the second half growth will be lower compared to H1. "Overall, the wait-and-watch policy of the RBI is prudent as it factors in incoming data prints into its reaction function. While the forward guidance remains dovish, we do not think a December rate cut is a done deal," Pan said.