What to expect from December 2025 RBI Monetary Policy

5 Dec 2025 , 04:58 PM

CONTEXT OF THE DECEMBER 2025 RBI POLICY?

In the previous policy meeting in October, the RBI did not touch the repo rates. With the RBI governor hinting at the possibility of a rate cut in December, there is hope built around a possible rate cut in December. However, the MPC will get down to looking at the hard data; and that is not too conducive for a rate cut. While inflation is very low at 0.25%, the question is whether there is a pressing need for a rate cut. After all, Q2FY26 GDP growth has been robust at 8.2%. Also, there is the risk of rupee weakening if rates are cut.

The RBI MPC will have a real tough debate on rates this time around. The RBI cut rates by 100 bps between February and June 2025 and may want to close the month with a flourish. However, that may not be a good reason to cut rates. The only possible logic to cut rates by 25 bps at this juncture could be the weak nominal growth. After all, at 8.7%, the nominal GDP growth is inadequate and that can get a push from a rate cut. The final decision may still depend on how much pressure the RBI sees on the Indian rupee!

RECAP OF KEY ANNOUNCEMENTS OF OCT-25 MONETARY POLICY

Here are key highlights of the October 2025 policy statement.

• RBI MPC held status quo on repo rates at 5.50% to allow time the transmission to sink in. Hence, SDF and bank rate also remained the same.
• The FY26 GDP growth estimate was hiked by 30 bps to 6.8%. This was based on the 7.8% Q1FY26 GDP growth and the limited impact of tariffs on overall growth.
• The August policy cut CPI inflation estimate for FY26 by another 50 bps to 2.6%; taking the total inflation downgrade to 220 bps since February 2025.
• The stance of the monetary policy was maintained at Neutral; although 2 of the 6 MPC members called for the stance to be shifted to “accommodative.”

Let us turn to the key expectations from December 2025 monetary policy.

• WILL RBI CUT 25 BPS OR HOLD STATUS QUO IN DECEMBER 2025?

Unlike the previous policy, there is a general expectation among economists that the RBI my cut rates by 25 bps in December. That is after the RBI governor hinted at a rate cut in December. However, a stronger reason could be the weak nominal GDP growth rate at just 8.7%, against the double-digit nominal growth that India has traditionally enjoyed. The RBI would still be a little sceptical about rate cuts because it has an impact on the rupee. In the last few weeks, the rupee has been knocking on the doors of ₹90/$ and it is only the RBI intervention that has kept the rupee in check. However, RBI would be concerned about the consistent selling of the rupee in the NDF market as well as the impact that its support to the rupee has on the forex reserves.

• WILL RBI CHANGE ITS FY26 REAL GDP GROWTH ESTIMATES

In the previous MPC meeting in October, the RBI had raised the GDP growth estimate from 6.5% to 6.8% for FY26. In the first half of FY26, the real GDP growth has been 8.0%. That means 6.8% for the full year presumes second half GDP growth at under 6.0% in real terms. That may give out a wrong message about future growth and the RBI would want to avoid that. Hence, a growth upgrade looks likely for FY26. However, the growth upgrade would be calibrated and cautious since the RBI would be wary of inflation picking up in coming months due to the unfavourable base effect. Hence a 20 bps to 30 bps hike in full year real GDP growth is the best that the markets can expect.

• WILL FY26 INFLATION ESTIMATES BE LOWERED FROM 2.6%?

That is again an area where a further downward shift is likely. To put things in context, RBI has already cut FY26 inflation estimates by 220 bps from 4.8% to 2.6% between February and October 2025. However, the average CPI inflation in the last 3 months is under 1.5%. In the previous policy, food prices a risk, but that is no longer a risk factor with the Rabi crop expected to be robust. With the inflation estimates already at 2.6%, the RBI may be cautious about further cuts, and may push it down marginally, just to send a dovish message. About 2.4% to 2.5% may be the best-case scenario.

The 3-day MPC meeting commencing on 03-Dec is likely to see intense debate on the rate trajectory. With the liquidity well under control, rate action may be the only real area of interest. That is where, this RBI policy could get interesting!