December MPC minutes shows clear preference for dovish stance

24 Dec 2025 , 03:19 PM

STORY BEHIND DECEMBER RBI POLICY STATEMENT

When the RBI MPC presented the Monetary Policy Statement on 05-December, the 25-bps rate cut to 5.25% was along expected lines. That led to the SDF rate falling in tandem to 5.00% and the Bank Rate / MSF Rate also falling in tandem to 5.50%. While the rate cut decision was unanimous, the stance was kept at “Neutral” with a 5:1 vote in favour.

For FY26, the GDP growth outlook was raised by 50 bps to 7.3%; in line with the robust GDP growth at 8.2% in Q2FY26. In addition, the RBI also cut the inflation estimate for FY26 by 60 bps from 2.6% to 2.0%. Inflation estimates have been cut by 280 bps since February 2025. Here is what the six members actually stated, as per the minutes of the RBI MPC.

1. NAGESH KUMAR WANTS RATE CUTS TO OFFSET GROWTH CONCERNS

Dr Nagesh Kumar underlined that the GDP growth in Q1 and Q1, while being robust, masked the possible impact of tariffs and trade restrictions. That is more likely to manifest in Q3 and Q4 of FY26. Nagesh Kumar has cautioned about the Goldilocks Moment argument, as the nominal growth had been disappointing, despite fairly attractive real GDP growth.

Nagesh Kumar voted for rate cuts as geopolitical and trade uncertainties had already started to hurt business sentiments; especially labour-intensive sectors. The rate cut will be more like a demand stimulus supplement to assist the fiscal measures that the government is already acting in tandem with the Ministry of Commerce to boost exports in tough times.

SAUGATA BHATTACHARYA THINKS REAL RATES ARE STILL TOO HIGH

Saugata Bhattacharya underlined that with such low inflation levels, the real rate of interest continues to remain high. For instance, with 5.25% repo rate and sub-1% inflation, the real lending rates are well above 5%-6%, which is too high by comparative global standards. The rate cut in December 2025 should help to temper that dichotomy.

However, Bhattacharya is also advising caution on future rate cut trajectory. According to Bhattacharya, the interest rates are already close to neutral levels. That means, any further rate cuts from these levels must be purely data driven. With inflation in control, the only objective that the RBI must be perceiving at this point is to boost economic growth.

RAM SINGH SUPPORTS RATE CUTS ON INFLATION AND GROWTH GROUNDS

According to Prof Ram Singh, both growth and inflation were driving forces for rate cuts. If one looks at the nominal rate of growth, at 8.7%, the nominal growth rate is definitely under pressure. On the other hand, the relatively attractive 8.2% real GDP growth was largely a function of low inflation levels. In a way, both data points are suggesting rate cuts.

According to Ram Singh, the risk of not cutting interest rates was that the current high levels of real interest rates were well above growth-supportive levels. The fall in inflation has been much sharper in 2025 than anticipated. That has depressed the real interest rates to a point where borrowing costs are once again looking high. That makes a case for rate cuts.

INDRANIL BHATTACHARYA WANTS AN ANTIDOTE FOR GLOBAL TURMOIL

Dr Indranil Bhattacharya, sees the rate cuts as a growth push initiative. That would essentially act as an antidote against the global uncertainty and weak rupee. Also, the GDP growth was expected to moderate in H2FY26, so a growth push would be really handy. Also, since inflation was at historic low levels, it is only appropriate that the RBI MPC leverages on this policy sweet spot and uses it to push economic growth. Like Saugata Bhattacharya, even Indranil Bhattacharya, has stressed the need to be data driven in future.

POONAM GUPTA SUGGESTS MAKING THE BEST OF INDIAN RESILIENCE

According to Poonam Gupta, it is not often that policy makers have the luxury of boosting growth through rate cuts, without worrying about a spike in Inflation. Most of the high frequency indicators have been hinting at improved growth, although some of the indicators like nominal GDP growth are also raising concerns over the level of economic activity and central government tax collections. Poonam Gupta has also underlined the need to leverage the recent fall in inflation to push growth-oriented monetary stimulus to the economy. She expressed confidence that there was little risk of the economy overheating.

RBI GOVERNOR HIGHLIGHTS THE NEED FOR LOWER REAL INTEREST RATES

Since there was consensus on the rate cut and straight majority on monetary stance, the vote of the RBI governor was not required. However, the RBI governor, Sanjay Malhotra, did emphasize the need to ensure lower cost of borrowings for households, corporates and also for the government. That is only possible when real interest rates are at abysmally low levels. Malhotra has also underlined that the low core inflation will ensure to keep and demand or price pressure under check. Conceptually Malhotra supported more rate cuts.

The policy undertone continues to be dovish, but there is a genuine sense of urgency to shift from an outlook-based approach to a data-driven approach. That would be a good shift!