Economists torn between rate cut and pause in next MPC

While participants in the domestic financial market are expecting a 25 basis-point policy repo rate cut in the December meeting of the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), economists remain torn between a reduction in rate cut and a pause.

Photograph: Danish Siddiqui/Reuters

In a panel discussion with Tamal Bandyopadhyay, with its title being “Taking India to a higher growth trajectory amid global headwinds”, on Wednesday, Samiran Chakraborty, managing director and chief economist, India, Citigroup, said: “We thought there was space for a rate cut both in the August and October policy meetings from the inflation standpoint.

“In December, the rate cut is not about space but the need for a rate cut. So we have to observe whether between now and December there is any discernible sign of any growth slowdown or not.

“And that’s why I am hiding behind wait and watch.”

The MPC kept the repo rate unchanged at 5.5 per cent in its October meeting, while striking a dovish tone and hinting that inflation risks were ebbing faster than anticipated.

The last round of reduction in the inflation projections for the current year (by RBI) and for the first half of next year has come in because of (cuts in) GST (goods and services tax), which is a policy change lowering the prices.

It is going to bring with it better demand.

So in this case, I am quite torn. I think a rate cut could have happened earlier, but as we go closer toward FY27, I think it’s going to be more and more difficult to cut rates.

So I am really on the fence for December,” said Aditi Nayar, chief economist, Icra.

RBI Governor Sanjay Malhotra, along with five other members of the MPC, had voted for the status quo on the short-term benchmark lending rate at the meeting, which concluded on October 1.

During the meeting, Malhotra said the benign outlook for headline and core inflation as a result of the downward revision of projections opened up the policy space to further support growth.

However, Sonal Varma, chief economist (India and Asia ex-Japan), Nomura, said central banks should adopt a forward-looking approach rather than being entirely data-dependent.

“Given the outlook for growth and inflation, there appears to be adequate space for a rate cut and they should move in that direction,” she maintained.

On growth, Varma said India was expected to grow at 6.5 per cent to 7 per cent as the US tariffs were unlikely to cause any lasting damage.

So, whether or not the tariffs come down, the current range provides sufficient flexibility.

In either scenario, exporters are likely to adapt and diversify their markets, she said.

“I think exporters will find a way to diversify and I don’t think US tariffs are going to be a permanent damage … so there is no difference whether US tariffs come down or not … the range gives enough flexibility,” she said.

On discussion around nominal gross domestic product (GDP) vs real GDP, Chakraborty argued that policymakers should not keep shifting the goalpost to fit a convenient narrative.

“For years, real GDP growth has been regarded as the key benchmark for policy decisions. Now, with nominal GDP growth slowing, changing the focus simply because it aligns better with the current narrative appears inconsistent,” he said.

Chakraborty pointed out that if next year the inflation rate rose to around 5 per cent due to a low base, nominal GDP growth would appear very strong.

In that case, he questioned whether policymakers would describe the economy as overheating simply because nominal growth looks higher.

While acknowledging that tax collection, credit growth, and the debt-to-GDP ratio were all tied to nominal GDP, he stressed that such arguments held only if the current low-inflation environment was viewed as structural.

If inflation is merely in a transitory low phase, drawing conclusions based on nominal GDP alone could be misleading, he cautioned.

Varma said nominal GDP was as important as real GDP, as slower nominal growth of 8-9 per cent in FY26 affected government revenues, corporate earnings, and household sentiment.

The current divergence between nominal and real growth has created mixed perceptions about the economy’s resilience.

Nayar agreed partly with both viewpoints but maintained that real GDP growth should remain the primary focus.

On inflation expectations, she noted that while households rarely internalised temporary drops in food prices due to base effects, they responded more to visible price changes, such as seasonal shifts in vegetable prices. However, she added the recent GST cuts could help anchor inflation expectations, as consumers were likely to notice and internalise lower prices in non-food items.