RBI may deliver one more rate cut in December, says report

The Reserve Bank of India (RBI) may cut the benchmark repo rate by another 25 basis points in December 2025, despite recent signals from Governor Sanjay Malhotra, according to a report by BMI, a Fitch Solutions company.

BMI, in its latest report titled “Reserve Bank of India No Legislation in 2025”, said it expects inflation and growth to remain below the RBI’s projections, leaving room for another rate cut this year.

The RBI had surprised the markets in June with a larger-than-expected 50 basis cut, reducing the repo rate to 5.5%.
“We expect another 25bps in December 2025, despite Governor Sanjay Malhotra closing the door on further rate cuts in the coming months,” the report said.

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Additionally, BMI said India’s actual policy rate, even with an additional cut of around 2.5%, highlighted that “the current stance remains overly restrictive relative to economic conditions.”

Inflation and growth outlook

BMI forecasts consumer inflation to average 3.0% in FY26, below the RBI’s 3.7% forecast and 4.0% medium-term target. “Many factors, including lowering global commodity prices, favorable weather conditions supporting agricultural outputs, weakening domestic demand pressures and limited wage growth despite tighter labor markets, will ensure inflation remains within the RBI’s target range of 2.0-6.0%.”

On the growth front, BMI says India’s GDP will expand by 6.0% in fiscal 2025-26, lower than the RBI’s forecast of 6.5%, suggesting economic activity is weaker than policymakers acknowledge. “We expect quarter 2025 data to reveal economic weakness more clearly than is currently recognized by policymakers, justifying the additional cut we expect following a possible pause in December.
August,” the report added.

Global Yield Differentials and Rupee Outlook

By the end of 2025, the RBI will reduce policy by 125 basis points, compared to the US Federal Reserve’s 50 basis point reduction, the report said. As a result, BMI expects bond yield spreads to move in favor of the US dollar in the coming months.

BMI said the rupee has already fallen 2.3% against the dollar since July 1 and stood at 87.5 per USD as of August 28.

However, the report added that investor confidence in the United States and concerns about “Trump’s erratic policymaking” and the independence of the Federal Reserve have also increased the strength of the dollar.

BMI now expects the rupee to weaken slightly to 89.5 per USD by the end of 2025.