Economists expect RBI to cut rates in February too amid lower inflation projection

Reserve Bank of India

A section of economists expects the Reserve Bank of India (RBI) to cut rates in February as well, building on the 25 basis points (bps) reduction last week. The optimism stems from the central bank’s inflation projection in December policy, which suggest more room for monetary easing.

Consumer price inflation (CPI) is expected to soften in the coming quarters, while economy is seen slowing, with GDP growth in Q4 pegged about 50 bps lower than earlier expectations. This weakening growth-inflation mix has strengthened the case for further policy support, they say.

Some economists also point to real interest rates remaining restrictive despite the recent cut.

“With inflation expected to average around 3 percent over the next about 12 months, current real rate would still be significantly higher than the RBI’s perceived neutral real rate of 1.4-1.9 percent, which implies that the ongoing rate-easing cycle may not be over yet,” said Siddhartha Sanyal, Chief Economist and Head of Research, Bandhan Bank.

While the RBI signals a focus on monetary transmission, given the growth and inflation dynamics, an additional 25 bps rate cut is expected in this cycle, particularly if global trade slows down, Nuvama Institutional Equities has said in a report.

Analysts caution that the central bank will continue to balance growth concerns with external risks, including global interest rate uncertainty and currency volatility, before committing to a deeper easing cycle.

The central bank took into account rupee’s current level while making the projections for Consumer Price Index (CPI) inflation for the current financial year, RBI governor Sanjay Malhotra said on December 5 as he shared the policy decisions.

“We have factored in the current levels of rupee while making projection of CPI inflation for FY26,” Malhotra said at the post-monetary policy press conference.

The central bank revised the CPI inflation lower by 60 bps for FY26 to 2 percent from 2.6 percent earlier.

The Q3 inflation was projected at 0.6 percent against earlier forecast of 1.8 percent and Q4 at 2.9 percent compared to 4 percent earlier. Retail inflation for Q1 of the new fiscal is seen at 3.9 percent now from 4.5 percent projected earlier. The RBI expects July-Sept FY27 CPI inflation at 4 percent.

"Headline CPI inflation declined to an all-time low in October 2025. The faster-than-anticipated decline in inflation was led by correction in food prices, contrary to the usual trend witnessed during the months of September-October,” Malhotra said.

“Core inflation (CPI headline excluding food and fuel) remained largely contained in September-October, despite continued price pressures exerted by precious metals. Excluding gold, core inflation moderated to 2.6 percent in October. Overall, the decline in inflation has become more generalised."

On December 5, the RBI cut repo rate by 25 bps to 5.25 percent from 5.5 percent after holding the rates in August and October.

The monetary policy committee kept the stance unchanged at “neutral”.

The standing deposit facility (SDF) rate remained unchanged at 5 percent and the marginal standing facility (MSF) rate and the bank rate at 5.5 percent.