Will a Combination of Low Inflation and Strong GDP Prompt an RBI Rate Cut?

RBI is widely expected to consider a 25 basis point (0.25 per cent) interest rate cut because inflation is at record-low levels while India’s GDP growth is very strong, giving the central bank room to support growth further without worrying too much about prices right now.​

What Is Happening?

Many economists expect the Reserve Bank of India (RBI) to reduce the repo rate by 25 basis points in the upcoming monetary policy meeting.​ This discussion comes at a time when India’s economic growth is one of the fastest in the world, even as inflation has fallen to historic lows.​

Key Numbers: Inflation and Growth

Retail inflation (CPI) dropped to around 0.25 per cent in October 2025, far below the RBI’s 4 per cent target and even below the lower end of its 2-6 per cent comfort band.​ At the same time, India’s GDP grew by about 8.2 per cent in the September quarter of FY 2025-26, the fastest pace in six quarters, showing very strong economic momentum.​

Why A Rate Cut Is On The Table

With inflation so low, the “cost” of cutting rates in terms of price pressures looks limited in the near term.​ Strong GDP growth, supported by reforms, government spending and resilient demand, means the economy can handle a small rate cut without overheating immediately.​

A 25 bps cut would signal that the RBI wants to:

• Support credit growth in housing, MSMEs and consumption as global conditions stay uncertain.​
• Avoid keeping real interest rates (nominal rate minus inflation) too high, which can discourage borrowing and investment.​

Why Some Experts Still Prefer A Pause

Some experts argue that with GDP already growing above 8 per cent, RBI should be cautious and keep rates unchanged for now.​ They worry that too much easing could hurt capital flows, pressure the rupee, or force banks to offer lower deposit rates, making it harder for them to attract savings.​

Others point out that food inflation is unusually weak and could bounce back due to weather, supply shocks or global commodity moves, pushing inflation up again later.​ Because of this, a “cut once, then pause for long” strategy is being discussed as a middle path.​

What A 25 bps Cut Means In Simple Terms

A 25 basis point cut means the repo rate (the rate at which RBI lends to banks) falls by 0.25 percentage points – for example, from 6.50 per cent to 6.25 per cent.​ If banks pass this on, home loans, car loans, personal loans and business loans may become slightly cheaper over time, reducing EMIs marginally.​

• For borrowers, this is positive as it lowers the interest burden, especially on large, long-term loans like housing.​
• For savers, returns on new fixed deposits and other interest-linked products may decline a bit, as banks adjust deposit rates to protect their margins.​

What It Signals For Markets And Investors

A rate cut, combined with high GDP growth, typically sends a supportive signal for equity markets because it lowers borrowing costs while earnings growth remains strong.​ Sectors like banking, housing, real estate, autos and consumer durables tend to benefit more, as they are sensitive to interest rates and credit demand.​

Bond markets may also react positively, as lower policy rates usually push yields down and increase bond prices.​ However, if RBI sounds very cautious in its guidance, markets might price in only one small cut followed by a long pause, rather than a full easing cycle.​

How RBI Will Balance Growth and Stability

RBI’s legal mandate is to keep inflation around 4 per cent, with flexibility between 2 per cent and 6 per cent, while also supporting growth.​ With inflation far below target and growth strong, the central bank must decide whether to use this window to ease policy now or save that space in case growth slows later or global shocks intensify.​ The most likely approach, as many economists suggest, is either:

• A 25 bps cut with a “wait and watch” tone, or
• A continued pause with a dovish (soft) commentary assuring adequate liquidity and readiness to act if needed.​

In simple words, India is in a rare position where prices are calm and growth is strong, so the RBI has some flexibility; whether it actually cuts rates or not will depend on how it judges future inflation and global risks, not just today’s good numbers.​

Disclaimer: The article is for informational purposes only and not investment advice.