MUMBAI: Despite the surprising Q2 growth numbers of 8.2% that surpassed the RBI's estimates, economists are still batting for a 25 bps rate cut next week, saying the economy will lose steam in the second half, necessitating support at a time when the inflation pressure is off the table.
The RBI's Monetary Policy Committee (MPC) faces a challenging act at the December rate review, amid a mix of strong growth and record low inflation, according to Radhika Rao, senior economist at DBS Bank.
“We expect an emphasis on forward looking growth guidance and high real rate buffer due to weak inflation, to justify a move to lower rates further,” she said.
Echoing her view, Rajani Sinha, the chief economist at Care Ratings, said, “Even while the Q2 growth number is much higher than expected, we feel the central bank could still cut the policy rate in the upcoming meeting on December 5."
Sinha added, “The very low inflation currently would give the central bank opportunity to cut rate as growth will moderate in the second half of the year and trade related uncertainties linger. The central bank will also consider that a part of the high growth in H1 is because of statistical factors.”
Devendra Kumar Pant, the chief economist at India Ratings, also agreed, saying that while strong 8% growth in H1 does not support the argument for monetary easing, weak inflation and nominal GDP growth in H1 being much lower than the budgeted GDP growth make a case for it.
“Therefore we believe the RBI may go for monetary easing 25-50 bps in the rest of FY26 to support nominal GDP growth and the overall growth in FY26 is expected to exceed forecast of 7%," he said.
"Despite the high real GDP growth, we retain our expectations of 25 bps of rate cut in the upcoming policy as inflation trajectory remains benign," said Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
However, Aditi Nayar, the chief economist at Icra Ratings, does not feel there will be a rate cut next week saying, “With the Q2 GDP growth exceeding 8%, the probability of a rate cut in the December 2025 review has certainly eased, notwithstanding the series-low CPI inflation print for October 2025.”
The government earlier in the day said the economy grew at a much faster pace of 8.2% printing in a six-quarter high in the September quarter. The average consensus was 7.3% and the revised RBI estimate was 7%. This takes the first half growth to 8%. In the first quarter, the economy grew by 7.8%.
“Front loading of production for exports, sustained rural demand, government spending and a lower deflator on account of much lower inflation have together lifted the Q2 GDP print beyond consensus expectations, and this momentum is likely to continue despite some headwinds from trade challenges," said Ranen Banerjee of PwC India.
He added, "The GST rate cuts and higher disposable incomes from income tax relief at the lower end of the tax brackets should keep urban demand supported, while good rainfall and the absence of major adverse climatic events point to rural demand holding up as well, giving us confidence of a strong GDP print in the second half."
On the output side, gross value added expanded 8.1%, up from 5.8% a year ago. The manufacturing sector led the improvement, clocking 9.1% growth vs 2.2% in Q2FY25 and 7.7% in Q1FY26. The upturn could be attributed partly to pre-festive stocking. Manufacturing now accounts for a little over 16% of total GVA, up from around 15.8%.
Agriculture, livestock, forestry and fishing grew 3.5%, only marginally higher than 3.7% in the previous quarter and 4.1% in the same quarter last year.
However, many analysts pointed out the lower than budgeted nominal growth which printed in at 8.7% -- a four-quarter low -- compared to 8.8% in the previous quarter, a phenomenon that economists note can have implications for financial performance.
"Nominal GDP growth is at 8.7%. However, it is only 0.5% above the real GDP growth. Nominal GDP growth in 1H is estimated at 8.8%, implying a GDP deflator-based inflation of about 0.8%. This low deflator inflation is due to both CPI and WPI inflation rates staying low at 2.2% and 0.1% respectively in 1H. The below-trend nominal GDP growth has significant implications for the fiscal aggregates," said DK Srivastava, chief policy advisor at EY India.