This morning has brought news which takes me back to my blog on the 26th of November.,when I pointed out this.
It feels as though the mood music has shifted back to interest-rate cuts and let me return to the ECB. It has claimed that interest-rate cuts are no longer necessary. Once you under stand how these people work that is the first step to another cut. As then they can present it as being forced by events rather than wanting to do it.
There is a secondary theme there as well which I will return to. But in numerical terms you could argue that a large interest-rate cut has just happened.
The Monetary Policy Committee (MPC) met on the 3rd, 4th and 5th of December to deliberate and decide on the policy repo rate. After a detailed assessment of the evolving macroeconomic conditions and the outlook, the MPC voted unanimously to reduce the policy repo rate by 25 basis points (bps) to 5.25 per cent with immediate effect…… The MPC also decided to continue with the neutral stance.
That was from the Governor of the Reserve Bank of India who has provided some unintentional comedy by cutting interest-rates whilst claiming to have a neutral stance. Sometimes these people cannot stop dissembling. But around 1.2 billion people have seen an interest-rate cut today which may be as many as I am expecting for the rest of this month, although of course several extra countries.
Economic Growth
One of my themes is in play here because if we return to my explanation above above the ECB we see that interest-rates have been cut because.
The economy witnessed robust growth and benign inflation;
So they cut because the economy was doing really well? Yes and they also apparently cut because the same is true of the world economy.
Contrary to earlier expectations, global growth has been relatively strong. Evolving geopolitical and trade environments, however, continue to weigh on the outlook. Inflation paths remain divergent with headline inflation remaining above target in most advanced economies, while pressures in most emerging markets are contained, providing room for accommodative monetary policy.
I do not know how many times over the years I have made the point that higher economic growth used to lead to interest-rate rises and not cuts, but it is a lot. These people so rarely get called out on this.
On the other hand, real GDP growth accelerated to 8.2 per cent in Q2, buoyed by strong spending during the festive season which was further facilitated by the rationalisation of the goods and services tax (GST) rates.
In fact he decided somewhat unbelievably to support it.
to support the growth momentum. Accordingly, the MPC unanimously voted to reduce the policy repo rate by 25 bps to 5.25 per cent.
If we think now of nominal growth targeting they suggest 5% per annum. Now India one might argue is looking at a higher target but we are above 8% and we have not added in inflation yet! The bits I have emphasised below reinforce my argument.
Real gross domestic product (GDP) registered a six-quarter high growth of 8.2 per cent in Q2:2025-26, underpinned by resilient domestic demand amidst global trade and policy uncertainties.1 On the supply side, real gross value added (GVA) expanded by 8.1 per cent, aided by buoyant industrial and services sectors
Looking ahead things are apparently positive too.
GST rationalisation and festival-related spending supported domestic demand during October-November. Rural demand3 continues to be robust while urban demand is recovering steadily.4 Investment activity remains healthy5with private investment gaining steam6 on the back of expansion in non-food bank credit,7 and high capacity utilisation8………Manufacturing activity continues to improve, while the services sector is maintaining a steady pace.
Even an area that ebbs and flows is doing well.
On the supply side, agricultural growth is supported by healthy kharif crop production,10 higher reservoir levels11 and better rabi crop sowing.
It looks as though someone at the RBI spotted this and tried to change tack.
High-frequency indicators suggest that domestic economic activity is holding up in Q3, although there are some emerging signs of weakness in few leading indicators.2
But all we really get is this.
Merchandise exports declined sharply in October amid subdued external demand, accompanied by softer services exports
If they are cutting interest-rates due to one months trade figures they are truly lost. Even worse if you look further you see that overall the trade picture has been improving.
India’s current account deficit moderated from 2.2 per cent of GDP in Q2:2024-25 to 1.3 per cent in Q2:2025-26 on account of robust services exports19 and strong remittances…..1 Healthy services exports coupled with strong remittance receipts are expected to keep CAD modest during 2025-26.
I am emphasising these points today also because they are hoping you have forgotten how often central banks use “output gap” theory to justify interest-rate cuts. Exactly how much of an output gap can you have with economic growth over 8% and expected to do this?
Taking all these factors into consideration, real GDP growth for 2025-26 is projected at 7.3 per cent, with Q3 at 7.0 per cent; and Q4 at 6.5 per cent. Real GDP growth for Q1:2026-27 is projected at 6.7 per cent and Q2 at 6.8 per cent. The risks are evenly balanced.
So yes a slowing but as you can easily argue the economy is overheating not much of an issue.
The Rupee
I have been looking for mentions of the Rupee in the Governor’s statement and as I doubt they forgot it the omission is intentional. Because if you look there is this.
The rupee has now breached the psychologically significant threshold of 90 to the US dollar, its lowest level ever, and is likely to weaken even further. The currency has been sliding all year, falling more than 5 per cent, making it the worst-performing Asian currency. ( Financial Times)
I recall when it passed 80 which was considered a big deal back then. But the fundamental point is that this is inflationary which I rather suspect is why it is not mentioned. Let me give you an example of this as the IEA estimates that India imported some 37% of its energy needs in 2023. As it uses large amounts of coal and oil this seems unlikely change much.
India is considering an unprecedented increase in coal power capacity, potentially building new plants until at least 2047, according to people familiar with the development. ( @business)
Inflation
Finally we get to something the Governor of the RBI can point to.
Inflation at a benign 2.2 per cent
Also in an area of concern.
The MPC noted that headline inflation has eased significantly and is likely to be softer than the earlier projections, primarily on account of the exceptionally benign food prices. Reflecting these favourable conditions, the projections for average headline inflation in 2025-26 and Q1:2026-27 have been further revised downwards.
With food prices rising in quite a bit of the world this year and this being a very volatile area in India to say the least especially around the price of the basic staple the onion one should take care. But of course they do not.
Both headline and core inflation are expected to be at or below the 4 per cent target during the first half of 2026-27. The underlying inflation pressures are even lower as the impact of increase in price of precious metals is about 50 basis points (bps).
You may note that they have Gold and Silver in the consumer inflation index.
If we look ahead then they forecast inflation to be on target so why cut?
CPI inflation for Q1:2026-27 and Q2 are projected at 3.9 per cent and 4.0 per cent, respectively.
Especially with the risks caused by a lower Rupee.
Comment
As you can see this is another case of central banking panic. A lower inflation reading and off they go.
For the first time since the adoption of flexible inflation targeting (FIT), average headline inflation for a quarter at 1.7 per cent in Q2:2025-26, breached the lower tolerance threshold (2 per cent) of the inflation target (4 per cent). It dipped further to a mere 0.3 per cent in October 2025.
Any mention of it being so high for so long thus having a type of catch-up? No. We are back to the same old assymetry where the usual theoretical suspects ( exchange rate, economic growth and output gap) get ignored when they do not give the answer required. After all you can do nothing about inflation in October now, Looking ahead money supply growth ( M3) is around 10% so no reason to cut,
