Economists Anticipate RBI Rate Cuts Amid Easing Inflation
Several global banks and economists are predicting a 25 basis points cut in the repo rate by the Reserve Bank of India (RBI) in December 2025, signaling the potential end of the current easing cycle. This forecast is bolstered by the recent drop in consumer price index (CPI) inflation to a near-zero level in October, which has increased confidence in the RBI’s ability to lower rates even if economic growth surpasses expectations. While such a cut would benefit borrowers, it could also pressure bank margins and prompt savers to seek higher returns in the market.
Predictions for the Repo Rate Cut
Analysts, including Kaushik Das from Deutsche Bank, anticipate that the RBI will implement a 25 basis points reduction in the repo rate during its December policy meeting. This would lower the terminal repo rate to 5.25%, down from the current 5.5%. The Taylor Rule, a formula used to guide interest rates based on inflation and output, suggests that the repo rate should decrease when inflation and growth are below target levels. Das noted that if CPI inflation averages between 4.2% and 4.3% in fiscal year 2027, real interest rates would remain positive, which is essential for maintaining macroeconomic stability.
The repo rate, which influences a significant portion of loans in India, currently stands at 5.5% following a series of cuts totaling 100 basis points since February 2025. These cuts included reductions of 25 basis points in February and April, and 50 basis points in June. A further cut in December would bring the rate close to the non-COVID low of 5.15% recorded in October 2019, indicating a significant shift in monetary policy.
Current Economic Indicators
Recent data reveals a dramatic decline in inflation, with the CPI falling to a record low of 0.25% year-on-year in October 2025, the lowest level since the current CPI series began in 2013. Additionally, wholesale prices are experiencing deflation, largely attributed to a one-time impact from a Goods and Services Tax (GST) cut. These developments suggest a favorable environment for the RBI to consider further easing of monetary policy.
Despite the positive domestic growth outlook, external factors such as trade tensions and restrictions from the United States may lead the Monetary Policy Committee (MPC) to adopt a cautious approach. Analysts believe that the upcoming decision will focus on adjusting the pace of easing rather than a binary choice between easing or tightening. The MPC is expected to highlight potential risks to future growth while leveraging the current low inflation to justify any rate reductions.
Market Reactions and Global Context
Market experts, including those from Crisil, Morgan Stanley, and Goldman Sachs, share the view that a rate cut is likely. They argue that the benign inflation environment should support growth, especially in light of potential risks from U.S. tariffs. Globally, many central banks have either initiated or continued easing policies due to subdued inflation and cooling growth, creating a supportive backdrop for the RBI’s potential actions.
As the RBI prepares for its December meeting, the upcoming GDP data for the second quarter, expected to show growth above 7%, will play a crucial role in shaping the committee’s decision. The MPC will need to balance the strong growth indicators against the backdrop of low inflation and external risks, making the December rate decision a closely watched event in the financial markets.
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