RBI MPC Meet: GDP, Inflation, Liquidity & Global Risks; key factors that may influence repo rate

Since the last Monetary Policy Committee (MPC) meeting in October, India’s macro story has flipped from an inflation problem to a ‘too low inflation’ scenario. Even GDP growth for Q2 FY26 has surprised many with fastest jump in six quarters to 8.2%. The CPI also crashed to a record low 0.25% in October. This unusual mix of strong growth and reduction in prices will impact RBI decision on 5th December. Between October and now, four data pillars like growth, inflation, liquidity and global uncertainty have changed sharply, which can significantly influence repo rate.

1. GDP growth: strong momentum

The first big input for the RBI is how growth has evolved since the last policy. Fresh data released after the October meet showed Q2 FY26 real GDP expanding by 8.2% year on year, far above the earlier projection of 7%. The surge was driven by a rebound in manufacturing, construction and services like trade, transport and financial services. It was supported by robust domestic demand and government capex during the same time.

Now many forecasters including RBI have increased full year FY26 growth around 6.8–7%, slightly higher than the RBI’s previous estimate. For the MPC, this can be a crucial point to consider as the economy is already growing, does it really need another rate cut right now? Strong GDP gives the RBI room to be patient, save some policy space for future shocks. RBI may additionally consider points like sluggish exports and inconsistent rural demand which gets benefits from lower rates.

2. Inflation at record low: good or warning sign?

As growth can be the reason to wait, inflation is the main reason for RBI to cut repo rate. Since the October policy, CPI inflation has been dropping to just 0.25% in October, which is the lowest point since 2012. Food prices have been in deflation, helped by better supply, lower vegetable prices and the impact of earlier GST rate cuts. At the same time core inflation has also eased steadily, though it remains higher than the headline figure.

With inflation not only below the 4% target but even under the 2% lower tolerance band, current repo rate of 5.5% is unusually tight for an emerging economy. Few economists argue that such high real rates could eventually choke off private investment and consumption if maintained too long. This is the reason several experts expect at least a 25-bps cut to 5.25% in December, while others expect another cut in February 2026 as inflation is currently below 2%.

However, the RBI usually does not look at one data point. Policymakers are aware that the current CPI declines in a few perishable items, can reverse quickly. They will study

momentum indicators, core inflation and other surveys to judge whether low inflation is sustainable or temporary. If the MPC thinks the 0.25% inflation number is temporary, it might act more carefully. It could either cut the repo rate once and then stop or even keep rates unchanged in December.

3. Liquidity in the banking system

Between the last MPC and now, liquidity conditions in the banking system have remained broadly comfortable. After cutting the repo by a cumulative 100 bps earlier in 2025, the RBI has ensured that money market rates stay close to the policy rate. It gave adequate funds to the banks to support credit growth. Banks are getting more money from customers as deposits, and loans are growing at a steady pace. Moreover, there are no signs of trouble in short term-money markets or government bond prices.

For the MPC, this means there is no liquidity crunch that forces an immediate rate cut. The real question now is a more strategic for RBI, should it use this period of low inflation to make money cheaper in the economy and bring loan interest rates down? People who support a rate cut say yes, because many bank loan rates, especially for small businesses and retail borrowers, are still based on the earlier high inflation phase and will really start reducing only if the RBI cuts the repo rate again. However, others counter that too much easing too quickly could pressure bank margins and make deposit mobilisation harder.

RBI will watch liquidity indicators like weighted average call rates, credit deposit ratio to decide how much extra support is required. If things like liquidity and markets stay normal, RBI may focus on small adjustments using its regular tools. In that case, even if it cuts the repo rate, it will likely be a one-time small move just to fine-tune rates, not the beginning of a big series of cuts.

4. Global Impact: US rates, commodities and geopolitics

Since the October meeting, the global environment has changed drastically both in terms of comfort and caution. On the positive side, major central banks like the US Federal Reserve have shifted from aggressive hikes to a wait and watch stance. This makes it less likely that an RBI rate cut will create a big gap between Indian and US interest rates.

Commodity prices, especially crude oil, have also remained contained. It eased India’s imported inflation bill and improved the current account outlook. At the same time, new tariffs under the US administration on some Indian exports and geopolitical tensions keep market sentiment fragile. For the MPC, this situation calls for a careful approach, as global conditions give India some opportunity to cut rates, but they also remind the RBI that it should keep some room to cut later if global problems hurt our growth or weaken the rupee.

On one hand, very low inflation, enough liquidity with banks and a friendly global rate environment support cutting. On the other hand, as growth is already very strong, and if RBI may want to keep some room to cut later, it might prefer to wait a little more before easing rates.