The Reserve Bank of India (RBI) is widely expected to announce a reduction in the key lending rate during its upcoming monetary policy review in December, according to a new analysis. A report by credit rating agency CareEdge, released on Tuesday, forecasts a 25-basis point cut in the repo rate, driven by a significant easing of inflation and robust economic growth momentum.
Inflation at Decadal Low Opens Door for Rate Cut
The primary factor paving the way for monetary easing is the dramatic fall in inflation. Consumer price inflation plunged to a ten-year low of 0.3 per cent in October 2024, a figure far below the RBI's medium-term target of 4 per cent. This substantial decline has created the necessary policy space for the central bank to consider lowering interest rates to support growth.
CareEdge anticipates that inflation will remain under control in the coming months. The report cites several supportive factors including stable Brent crude oil prices, healthy reservoir levels that are aiding rabi crop sowing, and subdued price pressures from excess industrial capacity in China. These elements are expected to prevent any sharp, unexpected spike in inflation.
Strong Growth with Expected Moderation
On the growth front, the Indian economy has displayed remarkable strength. The Gross Domestic Product (GDP) growth accelerated to 8.2 per cent in the second quarter (Q2) of the 2025-26 financial year. However, CareEdge projects a moderation in this pace to around 7 per cent in the second half of the fiscal year.
This expected slowdown is attributed to the fading boost from front-loaded exports and a natural moderation in consumption following the festive season. For the entire financial year 2025-26, the report maintains a GDP growth forecast of 7.5 per cent.
Real Policy Rate and External Resilience
The report provides a technical rationale for a potential rate cut by examining the real policy rate. With Consumer Price Index (CPI) inflation projected to average approximately 3.7 per cent over the next twelve months, the current repo rate of 5.5 per cent translates to a real policy rate of about 1.8 per cent. This is above the estimated neutral range of 1-1.5 per cent, indicating clear scope for a reduction.
Despite facing external challenges such as prolonged trade negotiations with the United States and ongoing geopolitical tensions, India's external sector remains sturdy. The report highlighted that the country's foreign exchange reserves have increased by USD 27 billion to reach USD 693 billion by mid-November 2024, underscoring strong macroeconomic buffers.
In its upcoming December policy meeting, CareEdge expects the RBI to formally revise its official projections for the fiscal year 2025-26. The agency anticipates the central bank will lower its inflation forecast to around 2.1 per cent and adjust its growth forecast to approximately 7.5 per cent.
