RBI May Deliver Another Rate Cut in December as Inflation Cools: Goldman Sachs

Goldman Sachs expects the Reserve Bank of India (RBI) to implement another rate cut in December 2025, citing easing inflation and stable food prices. Santanu Sengupta, chief India economist at the U.S. investment bank, said the RBI has sufficient room to lower borrowing costs further despite shifting its stance to neutral at its last policy meeting.

Inflation is projected to remain close to 3% by the end of this calendar year and around 4% in early 2026. “With food inflation softening and GST reductions feeding through, the case for further easing remains strong,” Sengupta said in an interview.

Inflation Trends and Policy Outlook

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The RBI has already cut policy rates twice in FY26 — a 25-basis-point reduction in April, followed by a larger 50-bps cut in June that brought the repo rate down to 5.5%. However, it maintained a pause in August.

Growth Drivers and External Risks

Sengupta expects India’s economy to expand steadily at 6.5–7% over the medium term, supported by resilient household consumption and tax reforms. Recent income tax reductions and GST cuts have bolstered demand, while a strong crop cycle has lifted rural incomes. Real agricultural wages are growing above 4%, further supporting consumption.

At the same time, external challenges remain. Sengupta cautioned that tariff-related uncertainties, global geopolitical risks, and policy volatility could weigh on growth. The Asian Development Bank has trimmed its forecast for FY26 to 6.5% citing such risks, while the IMF has raised its outlook slightly to 6.4% on domestic strength and improving global conditions.

Investment and Fiscal Challenges

Investment trends also show mixed signals. Gross fixed capital formation slowed to 7.8% in April–June 2025 from 9.4% in the previous quarter. While government-led capital expenditure has provided support, Sengupta noted that central spending as a share of GDP already peaked in FY24 at 3.2%, leaving little fiscal headroom. Private capex conditions remain favourable with healthy corporate and bank balance sheets, but global uncertainty has kept new investment activity subdued.

Sengupta emphasised the importance of structural reforms, especially in tax policy. He welcomed the move towards a simpler two-slab GST structure, which he said would improve compliance and enhance the ease of doing business. Stability in tax rules, he added, would help attract more foreign portfolio inflows, which have been cautious so far.

India’s external balance sheet remains a strength, with foreign exchange reserves of $700 billion, services exports equal to 10% of GDP, and low levels of external debt compared to other emerging markets.

Looking forward, Sengupta said, states must stick to credible fiscal paths to avoid steepening of bond yields. He also stressed the need to fully leverage India’s demographic advantage, especially rising female participation in the workforce, warning that the window of opportunity will not remain open indefinitely.

Conclusion

With inflation easing, GST reforms boosting consumption, and India’s economy on a stable growth trajectory, Goldman Sachs expects the RBI to cut rates again in December. However, external risks, fiscal challenges, and investment uncertainties remain key watchpoints for sustaining momentum in the medium term.