Too late for a rate cut? SBI Research says RBI’s tactical flexibility has ‘narrowed sharply’

The Reserve Bank of India (RBI) may have already missed the optimal window for a pre-emptive rate cut, as sharply lower inflation and robust growth now leave the Monetary Policy Committee (MPC) with limited tactical flexibility heading into its December and February policy reviews, SBI Research has said in its latest Ecowrap report.

SBI Research said it expects real GDP to grow 7.5% in Q2 FY26, keeping full-year growth in the 7.2–7.3% range.

With inflation consistently undershooting projections, the research wing said the central bank faces a narrowing policy corridor.

The report noted that the RBI’s October decision to maintain status quo on policy rates “appears to have substantially narrowed its tactical flexibility,” especially as inflation has remained below 4% since February 2025 and is projected to stay subdued through most of FY27.

SBI Research also said the February 2026 policy meeting, previously seen as the next plausible window for easing, is unlikely to offer the same freedom of action.

By then, multiple macroeconomic variables, including the First Advance Estimates of GDP, the Union Budget, quarterly GDP data, and new CPI and GDP series, will come into play, making it harder for the MPC to engineer a decisive policy pivot.

“In effect, the optimal policy window for a calibrated easing, the one that could have been executed pre-emptively, may have already closed,” the report said.

The research house termed the situation a “double whammy” for the MPC, as it must weigh strong growth momentum with inflation prints that have turned decisively benign.

SBI noted that its estimates show Q1 FY27 inflation trending below 3%, compared to the RBI’s earlier projection of 4.9%, later revised to 4.5% in the October policy.

The report added that long-term inflation forecasting remains highly uncertain in a “multi-polarised world.”

“With inflation forecasting on monthly basis remaining a difficult task, the audacity of long term forecasting can only weaken central bank’s communication with market forces, an agent that holds utmost importance in these trying times we believe,” it said.

While the December policy remains a “close call,” SBI Research said the RBI would need to clearly explain the rationale behind a rate cut at a time when growth is running above 7%.

“It will entirely depend on how RBI is able to communicate to the market a rate cut when growth numbers are in excess of 7%. Does the central bank talk about an aspirational growth rate? It remains to be seen, but central bank communication could take interesting turn in December policy if RBI had to cut rates,” the report said.

It added that liquidity management would also need recalibration, as credit demand is set to outpace deposit growth.

The commentary comes amid India’s headline retail inflation easing to 0.25% in October, its lowest on record, driven by a steep decline in food prices. Excluding gold, where inflation surged 57.8%, headline CPI turns negative at –0.57%.