Has the latest GDP data for India—at a higher-than-expected 8.2 percent for Q2FY26, led by manufacturing growth announced on November 28—stalled the Reserve Bank of India’s (RBI) potential move to lower interest rates (to spur growth), for the rest of FY26?
The RBI further lowered interest rates by 25 basis points on December 5, keeping in view the extremely low retail inflation.
Governor Sanjay Malhotra had given a fair hint of what they we were thinking. In the minutes of the last October policy meeting, Malhotra had said: “The benign inflation outlook opens up policy space for monetary action.” But he also added that the cumulative impact of fiscal and monetary measures was yet to be realised fully and tariff-related uncertainties were still evolving. This led the RBI to keep interest rates on hold at that time.
Economists had, in recent weeks, indicated that the RBI would cut rates in December—which it did—and then pause for the rest of FY26. Only a deepening fear of slowing growth will push the RBI for a further rate cut. The RBI has lowered rates by 125 basis points in 2025.
“This year, the story has been about growth overshooting and inflation undershooting," says Sakshi Gupta, principal economist at HDFC Bank. She had predicted the latest 25 bps rate cut, given the lingering risks on growth (in H2) and with inflation expected to remain well below 4 percent until Q3FY27.
India’s retail inflation fell to a historic low of 0.25 percent in October, aided by low food prices and the base effect. The depreciating rupee—which hit an all-time low of 90.43 to the dollar on December 3—has been subdued due to foreign fund outflows and uncertainty over the proposed India-US trade deal.
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But Gupta says the RBI is “more focussed towards the domestic economic levers”. In February, the RBI had cut interest rates when the rupee was depreciating significantly—it fell around 1 percent in that month impacted by sharp foreign fund outflows. Yet, the RBI cut policy rates.
“This interest rate argument has not been a strong influencer of currency movement,” Gupta explains. “This is a story about growth differential. We have a view that the rupee will be under pressure.”
The RBI, on December 2, stepped in to defend the rupee and stem further slide. “If there is a tussle between the currency and interest rates, it is usually the currency that wins,” R Sivakumar, head, strategy & products, Axis Asset Management, said in an interaction in October.
In the current scenario, there is also a possibility that the rupee will continue to be under pressure till the time India does not get a favourable trade deal with the US. Reports emerging from India’s commerce ministry indicated that this is likely to be finalised by end-2025.
The expectation that the trade deal will materialise will bring positive sentiment and a rally for the rupee. But the longer it takes for the trade deal to materialise, the rupee will continue to depreciate, and the upward retracement will not be towards ₹86 (to the dollar) levels.
Gupta of HDFC Bank forecasts the rupee over the next eight to 12 months in a weak ₹88-90 trend.
But is this the end of the road for no more rate cuts in FY26? Gupta said: “H2GDP growth could average close to 6.6 percent as the favourable base effect fades, government spending momentum moderates (after frontloading in H1), and drag from US tariffs (in the absence of an India-US trade deal) and slowdown in global growth—that is yet to play out fully—weighs on exports.”
She said that while consumer demand showed signs of improvement during this festive season, the durability of this pick-up over the coming months remains uncertain. “In this regard, one would need to see a sustainable improvement in labour market conditions, especially on the urban side to spur a continued recovery in demand,” Gupta tells Forbes India. All these factors will then determine whether the RBI needs to lower interest rates.
Latest data from the RBI shows that credit growth of scheduled commercial banks picked up in October to 11.3 percent (year-over-year), compared to 10.4 percent (year-over-year) as of September 19. But deposit growth was lower than credit growth.
First Published: Dec 18, 2025, 13:24
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