A Rate Cut Now Could Strengthen India’s Growth Cushion

The Monetary Policy Committee will meet from December 3 to 5 against a comfortable domestic backdrop and a more unsettled external environment. A rate cut at this stage could support private investment, lift capacity utilisation, and strengthen consumption and entrepreneurship. The reduced interest rate differential has already narrowed global arbitrage gains, which means any moderation in domestic rates may still allow overseas funds to flow in and ease sectoral pressures.

The current output gap suggests an economy operating near full capacity, a configuration that supports sustainable growth without immediate inflation risk. The economy does not need an urgent rate cut, although a measured one could reinforce momentum. Successive, well-sequenced policy actions balancing growth and inflation have helped bring CPI inflation to 0.25% in October 2025. GDP growth in the July to September quarter rose to 8.2% from 5.6% a year earlier, surpassing the RBI’s and the government’s estimates by 120 basis points. GVA growth rose to 8.1% from 5.8%. The manufacturing upswing was particularly notable given the geopolitical risks and tariff disputes weighing on sentiment.

Growth resilience has remained steady over the past three financial years. Quarterly GDP and GVA data show a rise from about 6–7% in 2023–24 to about 7–8% in 2024–25, and close to 8% in the first half of 2025–26. The October to December quarter could benefit further from GST rationalisation, softer lending rates, and a ₹450 billion support package to offset tariff-related pressures on exporters. The Export Promotion Mission for 2025–26 to 2030–31 and expanded credit guarantees should also strengthen activity. High-frequency indicators point to average GDP growth above 7% in 2025–26.

The post-pandemic record shows that the economy has the depth and scale to pursue the growth required for developed-economy status by 2047. The World Bank estimates that India needs to sustain real growth near 7.8% annually to reach high-income status, while several think tanks place the requirement closer to 8–9% for the broader Viksit Bharat vision.

The flow of credit will be critical. Banks are preparing to use the autonomy granted by the RBI to expand lending. November 2025 data show bank credit growth of 11.4%, outpacing deposit growth of 10.2%. The credit-to-deposit ratio has crossed 80%, which may lead some banks to rely on market borrowings to manage liquidity risk. Credit growth for 2025–26 is projected at 11.5%, with capital adequacy above 17.2%. NBFCs are reinforcing the flow of funds to the commercial sector.

Despite front-loaded measures, the banking system has nearly ₹3.74 trillion of excess liquidity. The weighted average call rate stood at 5.4% in November, close to the repo rate. The 1% reduction in the cash reserve ratio ensured adequate liquidity, although mobilising lending resources remains a challenge as alternative savings options gain ground.

External pressures have stiffened. Forex reserves, which were at $702.3 billion in October 2024, fell to $688.1 billion by November 21 due to steady outflows. The rupee depreciated 4.4% in 2025–26, from ₹85 to ₹89.5 per dollar by November 28. The RBI sold $21.6 billion to contain volatility rather than target a specific rate. The depreciation reflected a widening trade gap, persistent FPI and FDI outflows, the effects of higher US tariffs, and elevated crude prices, since 85% of India’s crude basket is dollar-priced. Geopolitical uncertainties increased dollar demand as a safe-haven. Efforts to internationalise the rupee are slowly reducing dependence on the dollar, although the effects are still emerging.

Global policy settings have turned more accommodative. The US Federal Reserve cut its policy rate by 25 basis points in October, the second cut of the year, bringing the range to 3.75% to 4% despite inflation at 3%. Eurozone inflation stood at 2.1% in October, close to the European Central Bank’s target, with policy rates steady following a June cut. The Bank of England reduced its policy rate to 4% in August even as inflation in October remained elevated at 3.6%.

Given the positive growth outlook and easing inflation, the RBI can raise its GDP projection and anchor inflation expectations below the 4% midpoint for 2025–26 and early 2026–27. The flexible inflation-targeting framework is due for review in early 2026, and the inflation band could shift in line with structural changes in underlying price dynamics. Historical patterns also suggest that room for further rate cuts in this cycle may be limited. With the current repo rate at 5.5%, there appears to be scope for three to four additional 25-basis-point reductions before a prolonged pause.

The RBI may have the option to wait, although holding rates unchanged could widen interest rate differentials, intensify capital outflows, increase pressure on the rupee, and reduce forex buffers. India’s domestic conditions cannot be insulated from global monetary movements. With the West lowering rates despite persistent inflation pressures, the RBI may find global alignment prudent, particularly with inflation risks receding and growth surprising on the upside. In such an environment, the central bank could opt for a calibrated 25-basis-point rate cut to maintain India’s global positioning and give the economy an added lift.