India’s economy is showing remarkable strength. The latest growth figures are prompting a serious debate about monetary policy. Analysts are now questioning the immediate need for interest rate reductions.
This comes even as inflation sits at a record low. The central bank has ample room to act, but the timing is suddenly uncertain. The robust growth data has changed the calculus for many.
India’s economy expanded at a sharp 8.2% in the July-September quarter. This was sharper than expected. It has led analysts to raise their full-year growth estimates above 7%.
The world’s fifth-largest economy is now expanding close to its estimated potential. Potential growth is the rate an economy can sustain without sparking inflation. This pace is estimated to be between 6.5% and 7%.
Meanwhile, retail inflation slowed to a record-low 0.25% in October. It is expected to remain benign for months. This creates a unique policy backdrop of strong growth and ultra-low inflation.
Gaura Sen Gupta, chief economist at IDFC First Bank, highlighted this scenario. She said the stellar growth numbers reaffirm her view of a pause in rate cuts. Space for easing is limited and should be saved for when downside risks to growth materialize.
A recent Reuters poll told a different story. A majority of economists had expected a rate cut this week. They forecast a 25 basis point reduction to 5.25% on December 5.
The poll also predicted a pause through 2026. The Reserve Bank of India’s monetary policy committee has already lowered rates by 100 basis points this year. It has held the rate steady since August.
RBI Governor Sanjay Malhotra recently acknowledged scope for further reductions. He said the timing would depend on the committee’s assessment. The decision is not automatic.
The debate now centers on real interest rates. Some economists argue a cut is still warranted. A. Prasanna of ICICI Securities Primary Dealership expects one 25 bps cut to adjust the real policy rate.
He cites inflation falling more than anticipated. The outlook also appears benign. This adjustment would reflect the change in inflation outcomes.
At current inflation, the neutral real rate is sharply higher. On a forward-looking basis, however, it is expected to be much lower. The RBI projects inflation at 4.5% for early fiscal 2027.
The estimated neutral real rate falls in a range of 1.4% to 1.9%. This technical assessment is key for the committee’s decision. It’s a complex balancing act.
Proponents of a cut also point to expected growth weakness. They believe growth will weaken in the second half of this financial year. External headwinds are a significant concern.
Economists point to punitive U.S. import tariffs. A 50% tariff on Indian goods will hurt exports and employment. Sectors like textiles and jewellery are particularly vulnerable.
Barclays changed its view after the strong GDP print. In a note, they said the print is too hot to ignore. They no longer expect a rate cut this Friday.
Investors, however, still hold some hope. Expectations have been tempered by the stellar growth data. The market is now less certain than before.
Further adjustments to official forecasts are anticipated. Economists expect the RBI to reduce its full-year inflation forecast from 2.6%. The full-year GDP estimate could be raised from the current 6.8%.
The stage is set for a pivotal policy meeting. Growth is stellar, yet risks loom on the horizon. The committee’s choice will signal its priority in this unique moment.