Markets brace for central bank double-header; will RBI, Fed set the stage for 2026 rate cuts?

Markets are at a crucial juncture, with both the Reserve Bank of India (RBI) and the U.S. Federal Reserve set to deliver their final policy decisions of the year. As investors seek clarity on the rate cycle and liquidity outlook going into 2026, the back-to-back central bank meetings are shaping up to be an important cue on where interest rates may be headed next.

With both policy decisions scheduled just days apart, markets will be closely watching the commentaries from the RBI and the Fed to gauge whether central bankers are preparing to set the tone for a possible rate-cut cycle in 2026.

The RBI’s monetary policy committee (MPC) began its three-day review on December 3, with Governor Sanjay Malhotra scheduled to announce the outcome on December 5.

So far this year, the apex bank has delivered three repo rate cuts, 25 basis points each in February and April, followed by 50 basis points in June, resulting in a total reduction of 100 basis points. The repo rate currently stands at 5.50%, with the central bank hitting paused button since June meeting and holding the rate steady at its August and October 2025 meetings.

Meanwhile, the Federal Open Market Committee is set to meet on December 9–10 for its final rate decision of the year, with markets overwhelmingly pricing in a cut. In the calendar year 2025, the Fed cut interest rates twice, with each cut being 25 bps in September and October. In the last policy meeting on October 29, 2025, the Fed announced a 25 bps rate cut, bringing the federal funds rate to a range of to 3.75% to 4.00%.

Will the RBI end the year with a rate cut?

Some economists expect a 25-basis points (bps) cut supported by the sharp decline in inflation, while others expect the central bank to pause and gauge the full impact of previous cuts.

Analyst at JM Financial believes that the MPC has a tough task at hand given the current growth–inflation dynamics, as it must juggle multiple considerations, including whether to prioritise growth over inflation, how far it can be forward-looking in a highly dynamic environment. The agency expects RBI to raise its growth projection by at least 20bps to 7% and lower its inflation forecast by 40bps to 2.2% in FY26.

“While a rate cut at this juncture will aid the soft growth patch anticipated in H2 FY26 it will risk further depreciation in INR. If the rate cut is not accompanied by a dovish tone, bond yields will harden further. The regulator can take the middle path by maintaining status quo, and guide for policy support in the upcoming months,” the brokerage said in its report.  

Echoing the same, Radhika Rao, Executive Director and Senior Economist at DBS Bank, said that the MPC faces a challenging act at the December rate review, with the mix of a strong growth print and record low inflation. “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."

VK Vijayakumar, Chief Investment Strategist, Geojit Investments, said that market is currently in the midst of two opposing forces: one negative and the other positive. Sharp depreciation of above 5% in the rupee and RBI’s policy of non-intervention to support the currency is a negative from the FII’s perspective.

Markets look to the Fed for clarity on the rate path

Though the market is fully pricing in a rate cut for December, the likelihood of another cut this month seems doubtful. The recent U.S. government shutdown, which delayed the release of key economic indicators, including October employment and inflation data, may compel the Fed to act cautiously and lean toward easing.

Major brokerages such as Bank of America, Goldman Sachs, and J.P. Morgan expect a reduction in interest rates, with a weakening labour market—underscored by a drop in private payrolls in November—strengthening the case for easing.

Moreover, recent dovish commentary from key Fed officials, including New York Fed President John Williams and Governor Christopher Waller, has further tilted expectations toward a rate cut.

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