8% GDP growth in Q2 may evince pause in RBI's MPC December review

The Monetary Policy Committee’s (MPC) upcoming policy decision on December 5, 2025, is set to be an interesting one, given the developments since the last meeting. While the extremely benign CPI inflation readings for the recent months and the soft near-term inflation trajectory provide room for rate cuts, stronger-than-expected GDP growth of 8 per cent in H1-FY26, challenges the need for further monetary easing at the current juncture. 

 

India’s headline CPI inflation had eased to 1.4 per cent in September 2025 from 2.1 per cent in August 2025, as the food and beverages (F&B) print reentered the deflationary territory after a gap of a month. Thereafter, it cooled to an all-time low of 0.3 per cent in October 2025, with the widening deflation in the F&B segment. However, the year-on-year (YoY) core-CPI inflation remained stable at 4.5 per cent in the month, as the continued hardening in gold and silver prices dulled the impact of the GST rate cut-led softening seen across several items in the core basket. Excluding gold and silver, core-CPI inflation eased to 2.6 per cent in October 2025 from 3.1 per cent in September 2025. 

 

 

ICRA expects the CPI inflation to remain benign at ~1.0 per cent in November 2025, amid a continued albeit narrowing deflation in the F&B segment. This would be the fourth instance of a reading below the lower bound of the MPC’s target range of 4 per cent+/-2 per cent in the last five months. Thereafter, the headline number is expected to cross the 3.0 per cent-mark in Q4 FY2026 and the 4.0 per cent-mark in Q1 FY2027. We expect the Committee to pare its quarterly CPI inflation forecast trajectory, bringing down the average for FY2026 by at least 40 bps from its current forecast of 2.6 per cent.

 

On the growth front, the pace of GDP expansion unexpectedly surged to a six-quarter high of 8.2 per cent in Q2 FY2026 from 7.8 per cent in Q1-FY26, exceeding the MPC’s (and our) estimate of 7 per cent. The upside surprise relative to our projections was driven by the services sector, even as growth in the industrial and agricultural segments was in line with expectations. 

 

Subsequent data is muddled with base effects. While indicators of consumption such as vehicle registrations boomed during the festive season, the growth in the Index of Industrial Production fell to a 14-month low of 0.4 per cent YoY in October 2025. Consumer durables’ output contracted by 0.5 per cent following the 10.0 per cent surge seen in September 2025. Besides, the extent of the contraction in consumer non-durables widened sharply between these months. It appears that the GST rate cut led upswing in manufacturing output in September 2025 was followed by a respite in October 2025 given the earlier onset of the festive season and the associated holidays. 

 

Moreover, gross GST collections were a marginal 0.7 per cent higher on a YoY basis in November 2025 (reflecting transactions in October 2025), as increased consumption likely offset the impact of rate cuts across a large number of items. 

 

Looking ahead, the adverse impact of the US tariffs and penalties on India’s merchandise exports, output and employment across some sectors is expected to set in from Q3 FY2026. Following the frontloading seen in H1 FY2026, the Government of India’s (GoI) capex is implicitly set to contract by as much as 15 per cent in H2 to meet the FY2026 budget target, unless the allocation is enhanced. These factors, along with an adverse base, are likely to dampen the pace of growth from the robust 8.0 per cent seen in H1 FY2026.

 

Growth estimates

 

While the growth outcomes in H2-FY26 are likely to be weaker than H1, the stronger-than-expected growth momentum in Q2 and the favourable impact of the GST rate rationalisation on festive demand may lead to some upward revision in the MPC’s quarterly growth estimates for Q3 and Q4, which are currently centered around the 6.3 per cent-mark.  Besides, the material beat in the Q2 GDP print vis-à-vis expectations by itself would force a significant upward revision in the Committee’s GDP growth estimates for the ongoing fiscal. ICRA projects the FY2026 GDP growth at 7.4 per cent, significantly higher than the MPC’s current forecast of 6.8 per cent.

 

Amidst a sharp widening in the trade deficit for October 2025 and capital outflows, the INR has marked fresh all-time lows against the USD recently. Interestingly, the US Federal Reserve’s December 2025 meeting is a few days after the MPC’s last scheduled review for 2025, in which it may cut rates further.

 

A downward revision in the CPI inflation trajectory along with an upward revision in growth estimates would complicate the MPC’s policy decision. While the expected CPI inflation trajectory is likely to be revised lower, it would nevertheless remain upward sloping. On the other hand, while GDP growth is projected to cool off in H2 FY2026 vis-à-vis H1, the trajectory for the estimates is expected to shift upwards, relative to the current levels. All told, we expect the MPC to pause in its upcoming review. 

 

Aditi Nayar is Chief Economist, Head- Research & Outreach, ICRA. Views are her own.