RBI's December Policy on a Knife-Edge as Emkay Flags Strongest Case Yet for Rate Cut

Just a few days after India reported 8.2 per cent GDP in the second quarter of FY25, now the Reserve Bank of India's Monetary Policy Committee (MPC) gears up for its final meeting of 2025, economic signals are flashing in multiple directions but one theme is getting louder: inflation is collapsing faster than the RBI can keep up with. In its latest policy preview, Emkay Global Financial Services says the central bank may have little room left to delay a rate cut and forecasts a 25-basis-point reduction in the December review, even with the likelihood of a split vote.

The RBI will meet for the December Monetary Policy Meeting ( MPC) from December 3rd to December 5th. The policy meeting is happening at the time when India registered robust Q2 growth and low inflation.

The research house argues that both the RBI and financial markets have repeatedly misread the macro cycle this year. Inflation has consistently undershot projections, while GDP growth prints have surprised on the upside, powered partly by statistical quirks that mask underlying frailties in consumption and nominal output.

"This is the most unreliable macro cycle India has seen in recent years. Both inflation and growth have behaved in ways that have challenged every forecast, including the RBI's own," said Madhavi Arora, Chief Economist at Emkay Global.

Inflation Collapse Gives RBI 'Clear Visibility'

At the heart of Emkay's argument for immediate easing is the aggressive downward shift in India's inflation trajectory. The RBI has trimmed its FY26 inflation projections four times since April; Emkay expects the December policy to bring a fifth cut, potentially by 50–60 basis points.

Emkay's own forecast, at 1.92% CPI inflation for 2HFY26, sits roughly 130 bps below the RBI's latest estimate.

"Inflation is not just moderating, it is resetting lower in a way that leaves little ambiguity. With CPI heading towards 2%, the RBI cannot justify delaying its policy response any further, especially given its statutory mandate," Arora said.

She also cautioned that the RBI's reliance on a one-year-ahead CPI anchor, currently pegged at 4.5%, creates policy lag at a time when the economy is already deep into a disinflationary phase.

"Anchoring to a one-year-forward projection that has repeatedly proven wrong is increasingly misplaced. Policy must respond to actual visibility, not hypothetical risks," she added.

Growth Outperformance Hides Structural Weakness

India's GDP growth surprised at an impressive 8.2% in Q2, but Emkay argues the number is flattered by a benign deflator and delayed effects of past monetary and regulatory easing.

The underlying growth engines remain fragile, it warns, especially as nominal GDP, crucial for fiscal ratios, corporate earnings and credit flows, is likely to print below 8% this year.

"The headline numbers are overstating economic momentum. Consumption is still uneven, exports have taken limited damage so far, and the income effect will eventually dominate overall demand trends," Arora said.

Emkay expects the RBI to peg FY26 real GDP growth at around 7%, in line with Emkay's own estimate of 7.3%.

A deeper slowdown in nominal GDP, Arora said, would require India to undertake "much sharper fiscal consolidation to preserve its debt-to-GDP trajectory, a challenge the budget will not be able to ignore."

Rupee Weakness 'Natural Stabiliser', Not a Barrier to Cuts

One of the strongest arguments made by rate hawks is that further easing could weaken the already fragile rupee. The currency has been the worst-performing in Asia in FY26 so far. Emkay disputes this fear.

"The rupee's softness should not be misread as a deterrent to easing. With India losing export competitiveness to EM Asia, partly due to higher tariffs, a weaker currency is functioning as a natural stabiliser, especially for the current account," Arora said.

She added that FX pressures alone cannot become a policy constraint, particularly when real interest rates in India are already among the highest in EM Asia.

Liquidity Crunch Looming: A Bigger Concern Than Rates

Beyond the debate on timing of the rate cut, Emkay flags liquidity as the RBI's more pressing headache.

Banking system liquidity has tightened sharply since September due to unsterilised FX intervention. By March 2026, system liquidity could fall to barely 0.2 -0.3% of NDTL, unless the RBI injects fresh liquidity.

Emkay estimates the central bank will need to infuse Rs 2 trillion of primary liquidity likely through open market operations over the rest of FY26 to keep conditions stable.

"Markets are obsessing over the timing of the next 25 bps but the real story is liquidity. Without at least ₹2 trillion of fresh infusion, the yield curve will remain unhealthily steep and transmission will remain clogged," Arora warned.

She emphasised that the RBI's balance sheet has grown only 4.4% this fiscal, meaning the central bank will need to use its tools more actively in the coming months.

Yield Curve Stress Signals Tight Conditions

The sovereign yield curve remains much steeper than pre-June MPC levels. Corporate bond curves are even steeper, underscoring the tightening in financial conditions.

"The current steepness is neither desirable nor sustainable. It is a reflection of liquidity stress and the market's discomfort with policy uncertainty. Liquidity measures will have far greater impact than rate cuts alone," Arora said.

What Happens on December 6?

Emkay maintains that a 25-basis-point cut is the most probable outcome of the upcoming MPC meeting, though dissent is likely.

The RBI's communication strategy will be just as crucial as the decision itself, the brokerage says, especially given the need to guide markets through a noisy macro cycle.

"This is not a straightforward policy moment. The RBI must cut, but it must also communicate in a way that avoids misinterpretation — both on inflation and the rupee. The narrative management will be as important as the rate action," Arora said.