Rate Cut or Hold: RBI MPC Faces Uncertainty Amid Surging 8.2% GDP and Falling Inflation

Rate Cut or Hold: The financial spotlight of the nation turns to Mumbai today as the Reserve Bank of India’s (RBI) critical bi-monthly Monetary Policy Committee (MPC) meeting commences. This two-day gathering of the six-member committee will culminate in the much-anticipated decision on Interest Rates, which will be announced by RBI Governor, Sanjay Malhotra, on December 5 at 10:00 AM. While the central bank has maintained a steady course over the past few cycles, keeping the repo rate anchored at 5.5 per cent, the current economic data has split expert opinion, turning this meeting into a genuine, high-stakes puzzle for the Financial Markets.

The Economic Conundrum: Strong Growth vs. Record Low Inflation

The primary source of contention among leading economists stems from a rare divergence in India’s macroeconomic indicators. On one hand, the economy delivered an unexpectedly strong GDP Growth rate of 8.2% in Q2 FY26, signaling robust economic activity. On the other hand, the nation simultaneously reported a multi-year record-low CPI Inflation rate of just 0.25% in October ’25. These two developments, as explained by Mehul Pandya, MD and Group CEO of CareEdge Ratings, are “mutually opposing forces” from an interest rate perspective, forcing the MPC to balance conflicting policy signals and complicating the final Rate Decision.

Conflicting Policy Signals: The Central Bank’s Dilemma

Pandya further elaborated on the central bank’s unprecedented dilemma. Traditionally, central banks exhibit reluctance to cut Interest Rates during periods defined by strong economic activity and rapid GDP growth, as easing policy could potentially overheat the economy. Conversely, the established policy playbook dictates that central banks should typically respond to a sustained, low inflationary environment by cutting rates to stimulate demand. The RBI is now caught between these two powerful, contradictory forces, making the choice to maintain the neutral stance or opt for a decisive Policy Shift exceptionally difficult to predict.

Nuvama Predicts a Cut: Sluggish NGDP and Inflation Room

Despite the headline-grabbing strength of the real GDP growth in Q2, the analysis from Nuvama leans firmly towards a rate cut. The firm points to the metric of Nominal GDP (NGDP), which remains sluggish and stubbornly stuck below 9 per cent, suggesting underlying softness in the economy. Furthermore, while the expected GST cut might provide a boost to consumption, Nuvama believes that a likely slowdown in government spending during the second half of FY26 (2HFY26) could serve as a significant offsetting factor. Based on these dynamics and the impact of tariffs, Nuvama concludes that the multi-year low CPI Inflation provides the regulators with ample, necessary room for a Repo Rate Cut in December.

Crisil’s Insurance Policy: Hedging Against Global Uncertainty

The anticipation for an easing cycle is echoed by other major institutions, including Crisil. Dharmakirti Joshi, Chief Economist at Crisil, suggests that the primary motivation for a rate cut may not be purely domestic. He argues that given the “volatile and uncertain global environment,” the move could be strategically interpreted as an Insurance Rate Cut. This policy move would preemptively shield the Indian economy from potential external shocks, such as the impact of US tariffs, providing a cushion of easier liquidity. For Crisil, the current economic climate justifies a proactive, protective Monetary Policy stance rather than a reactive one focused solely on domestic indicators.

Bank of Baroda Holds Firm: Steady Rates Amid External Headwinds

Offering a contrasting view, Aditi Gupta, an economist at Bank of Baroda, argues compellingly for the MPC to maintain its current Interest Rate levels. Gupta contends that the combination of strong economic growth and inflation that remains within the central bank’s tolerance range provides the MPC with the crucial space required to keep rates steady. This steady approach is seen as a necessary measure while the central bank navigates a challenging and uncertain external environment. For Bank of Baroda, the stability achieved at the current repo rate is a valuable asset that should not be risked unless economic conditions drastically warrant a change in Economic Outlook.

Domestic Resilience: Recovery in Consumption and Private Investment

Supporting her argument for holding rates, Gupta notes that the Indian economy is expected to have successfully maintained its growth momentum into Q3 FY26. This resilience is attributed to a continued recovery in urban consumption patterns and a surprisingly robust performance in rural demand. Furthermore, the economy is showing promising signs of recovery in private investment, which is evidenced by a noticeable pickup in credit demand across various sectors. This comprehensive Economic Recovery narrative suggests that the current monetary policy settings are effective in fostering growth without creating inflationary pressures, thus justifying a continued pause.

The Liquidity Watch: Beyond the Rate Decision

Finally, Gupta emphasizes that the market’s focus on December 5 should extend beyond the binary rate decision. She notes that the RBI’s guidance and any actions concerning Liquidity Management will be equally, if not more, critical to watch. Easier liquidity conditions within the banking system are fundamentally essential for the successful Transmission of monetary policy signals to the broader economy, ensuring that banks pass on any potential rate cuts to consumers and businesses. Therefore, the commentary on liquidity and open market operations will provide crucial insights into the central bank’s strategy for maintaining financial stability and supporting credit flow.