The Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) began its three-day meeting on Wednesday, with immense anticipation surrounding the potential decision on the repo rate, set to be announced on December 6 at 10 AM. This meeting comes at a crucial juncture, as India’s economic growth has shown signs of slowing down, prompting mounting calls from experts, economists, and policymakers for a rate cut to stimulate activity and provide a boost to the economy. However, inflation remains a major concern, making the decision more complex.
The repo rate, which plays a critical role in determining borrowing costs across the economy, has been held steady at 6.5% for the last nine consecutive meetings. The RBI’s cautious stance has been a result of its delicate balancing act between promoting economic growth and maintaining inflation control. In the current environment of subdued growth, many have urged the RBI to take steps to lower borrowing costs, which could encourage spending, investment, and consumption.
Key figures, including Chief Economic Adviser V Anantha Nageswaran, Commerce Minister Piyush Goyal, and Finance Minister Nirmala Sitharaman, have advocated for a reduction in interest rates, highlighting the need for an accommodative policy stance in light of the slowdown in growth. Commerce Minister Goyal, in particular, has criticized the direct link between food inflation and interest rate decisions, calling it “absolutely flawed.” He suggested that lowering borrowing costs could help stimulate demand and kickstart economic activity. Despite the calls for a rate cut, RBI Governor Shaktikanta Das has repeatedly emphasized inflation—particularly food prices—as a risk that needs to be contained to ensure long-term economic stability.
India’s GDP growth has notably decelerated in recent months, with the second quarter of FY25 seeing a meager 5.4% growth, the weakest pace in seven quarters. Manufacturing, a key driver of the economy, grew by just 2.2%, while both consumption and private investment have shown signs of weakening. Agriculture, on the other hand, showed some positive growth with a 3.5% increase, providing some relief, but overall economic activity remains under pressure.
Radhika Rao, Senior Economist at DBS Bank, noted that this weak GDP print could represent the bottom of the current economic cycle, but she also pointed out that it puts the RBI’s growth forecast of 7.2% for the full year at risk. Rao has revised the full-year growth expectations down to a range of 6.2%–6.4%. The sharp slowdown in economic activity has led to questions about whether the RBI’s current policy is sufficiently supportive of growth, especially in the face of persistent inflationary pressures.
Inflation remains a key hurdle for the RBI. In October, the country experienced a surge in inflation, which rose to 6.2%, the fastest pace in over a year, primarily driven by food prices. Although inflation is expected to ease slightly in November, it remains well above the RBI’s target of 4.5%. This high level of inflation has made it more difficult for the RBI to justify a rate cut. Mandar Pitale, Head of Treasury at SBM Bank India, emphasized that inflation has been at the upper end of the target range for the past two months, which limits the room for rate cuts. He added that the RBI must carefully balance the need for growth-supportive measures with the ongoing inflation concerns.
Another key factor influencing the MPC’s decision is the liquidity situation in the banking system. Liquidity has tightened recently due to various factors, including GST outflows, foreign exchange interventions, and rising overnight borrowing costs. These factors have raised concerns about systemic liquidity, and there is growing speculation about whether the RBI will take measures to address this issue. Harsimran Sahni, Executive Vice President and Head of Treasury at Anand Rathi Global Finance, noted that the RBI could consider measures like a phased cut in the Cash Reserve Ratio (CRR) or open market operations (OMO) to ease liquidity pressures. Analysts suggest that a 25-basis-point CRR cut could inject approximately Rs 1.15 lakh crore into the banking system, which would help ease liquidity constraints.
The rupee has also come under pressure in recent months, largely due to the strength of the US dollar and portfolio outflows. The RBI has actively used its foreign exchange reserves to stabilize the currency, but this approach has its limitations, particularly in the face of ongoing external pressures. As the Indian rupee faces downward pressure, the RBI’s ability to maintain stable liquidity and control inflation could influence the final decision on the repo rate.
As the MPC’s meeting progresses, analysts remain divided on whether the RBI will decide to cut the repo rate or adopt a more cautious approach. Some experts believe the likelihood of a rate cut is uncertain, with inflation remaining a significant concern. However, others argue that the economic slowdown is building pressure for more growth-supportive measures. Sahni from Anand Rathi noted, “The likelihood of a rate cut in December is like a flip of a coin. Inflation remains a concern, but the GDP slowdown has built pressure for growth-supportive measures.”
Others, however, suggest that the RBI may choose a "dovish hold," where the central bank maintains the current rate but signals a willingness to cut rates in the future if the economic slowdown continues. Rao from DBS Bank stated, “We expect a dovish stance with more members voting for a cut compared to the 5:1 ratio at the last review. A rate cut is more likely at the February meeting, but the recent GDP miss might push the MPC to act sooner.”
The RBI finds itself in a difficult position, having to weigh the need for supporting growth against the persistent risks posed by high inflation and external pressures. Given the uncertain economic landscape, the RBI’s decision on the repo rate will be closely watched by both domestic and international investors, as it will likely influence India’s financial and economic trajectory in the months ahead. Whatever the outcome, the RBI’s decision will carry significant implications for interest rates, inflation expectations, and overall economic stability.
