The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) commenced its three-day meeting on December 3, 2025, amidst mixed signals from the Indian economy. The MPC, led by Governor Sanjay Malhotra, is expected to announce its decision on December 5, with many anticipating a potential 25 basis points (bps) cut in the repo rate. This move has sparked considerable debate among economists and market participants, primarily centered around whether such a cut would ignite a rally in the Indian stock market.
India's economic landscape presents a complex picture. On one hand, the Q2FY26 GDP growth surged to a six-quarter high of 8.2%. On the other hand, industrial production grew by a mere 0.4% year-on-year in October, marking its slowest expansion in 14 months. Simultaneously, retail inflation plummeted to a record low of 0.25% in October. These mixed signals create a challenging scenario for the MPC, forcing it to carefully weigh its options.
Several factors support the possibility of a rate cut. The most prominent is the significant decline in retail inflation, which has remained below the government's 2% lower tolerance band for the past two months. Crisil Chief Economist Dharmakirti Joshi anticipates a 25-basis point cut in the repo rate in December, citing the considerable decline in retail inflation. Mayur Modi, Co-founder and Co-CEO of Moneyboxx Finance Limited, argues that easing inflation, remaining comfortably within the RBI's tolerance band, strengthens the probability of a repo rate cut. He believes that softening price pressures provide the MPC more room to prioritize growth without risking macroeconomic stability and that a well-timed reduction could stimulate credit demand and lift consumption cycles.
Conversely, some experts believe that the RBI will maintain the status quo, keeping the repo rate unchanged at 5.50%. VK Vijayakumar, Chief Investment Strategist at Geojit Investments, suggests that there is no need for monetary stimulus when the economy is already performing strongly. Aditi Gupta, Economist at Bank of Baroda, anticipates that the MPC will keep the repo rate unchanged while retaining a neutral stance, citing strong GDP growth and easing inflation, which provide the RBI with room to pause rates as it monitors global uncertainties.
The potential impact of a 25 bps rate cut on the Indian stock market is also a subject of debate. Proponents argue that a rate cut would lower borrowing costs for companies, potentially leading to increased investment and higher corporate earnings. This, in turn, could boost investor sentiment and trigger a rally in the stock market. Moreover, a rate cut could make fixed-income investments less attractive, driving investors towards equities in search of higher returns.
However, others believe that the impact of a rate cut may be limited. The rupee has already depreciated by more than 5%, and the RBI's apparent lack of intervention suggests a tolerance for this depreciation. Further rate cuts without a dovish tone may harden bond yields. Additionally, the global economic outlook remains uncertain, with ongoing geopolitical concerns and the potential for further interest rate hikes by the US Federal Reserve. These factors could dampen investor enthusiasm and limit the extent of any potential stock market rally.
The RBI faces a complex decision. While low inflation may warrant a rate cut, the strong economic momentum might suggest otherwise. The MPC must also consider the impact of its decision on the rupee, bond yields, and overall financial stability. The outcome of the meeting remains uncertain, and market participants will be closely watching the RBI's announcement on December 5 for clues about the future direction of monetary policy.
