Developments since June 6 decision show why we need to be cautious: MPC’s Nagesh Kumar

Global crude oil prices rose to around $75 per barrel after Israel attacked Iran on June 13. Investors are now anticipating another sharp increase in oil prices after the US said on June 21 it had bombed three Iranian nuclear facilities. Speculation is rife if Iran – which has called the US attack outrageous and said it reserves all options to defend its sovereignty – will look to retaliate by blocking the Strait of Hormuz, a key waterway which handles almost a quarter of the global oil trade.

In an interview with Siddharth Upasani, Kumar – Director and Chief Executive of New Delhi-based think-tank Institute for Studies in Industrial Development – also discussed how a consensus was finally achieved on his calls for a 50 bps rate cut and why growth numbers are not showing a broad-based revival, among other subjects. Edited excerpts:

You said on at least on a couple of occasions before June that the MPC could be more ambitious and go for a 50 bps rate cut. So, you finally got what you wanted.

In the last meeting (in April) itself I had started making a case for a 50 bps cut. But at that time, trends were not very clear. There was uncertainty about the inflation number – it had begun to come down, but the drop was not significant enough. However, in June, we had numbers before us like 3.2 per cent in April. It has gone down even further in May. Looking ahead, the outlook seemed to be quite comfortable and benign because of the expectation of a better-than-normal monsoon, the declining prices of crude oil, and the softening of the US dollar.

It was in that context and keeping in mind the continued concern about tariff-related uncertainties –the external economic environment had become very uncertain and volatile, with International Monetary Funds and Organisation for Economic Co-operation and Development downgrading the outlook very significantly, and World Trade Organization (WTO) projecting -1.5 per cent growth in world trade – and the need to support growth and the continued concerns about urban consumption and private investment not picking up that we cut the repo rate by 50 bps.

In my view – and I articulated this in the April meeting – compared to two cuts of 25 bps each, one larger cut of 50 bps would be more effective. My reason was very common-sensical: if it is a quarter percentage point reduction, the banker might absorb a part of it as it is such a small change. But if it is 50 bps, the banker will have to pass it on with lower lending and deposit rates. We have seen the transmission of the 25 bps cuts being a bit slow. Of course, there will be a lag. But the stickiness of the deposit and lending rates was there. But 50 bps would be large enough to push the banks to take it into account. And if we feel confident that we will need another cut of 25 bps two months down the line, why not frontload it? That’s why I made a case for a 50 bps cut. And this time, compared to April, the reason and policy space were much more solid. Seeing that, the consensus between us was easier to achieve.

You have spoken of the need to revive private consumption, especially urban consumption. How do we reconcile this with the fact that the RBI, around two years ago, clamped down on personal loan growth?

Well, at that time, inflation was high. And inflation targeting requires action when inflation is high. Even till October 2024, when the MPC was reconstituted, inflation was quite high around 6 per cent. The RBI’s action also needs to be seen in the context of growth. We ended 2023-24 with a very robust 9.2 per cent growth. Growth was much less of a worry at that time.

Normally, a 50 bps repo rate cut is seen as urgently supporting growth. But GDP growth in Jan-Mar 2025 was above expectations at 7.4 per cent and the RBI has retained its 6.5 per cent growth forecast for 2025-26. Was there an urgency to support growth?

Yes, 7.4 per cent was a pleasant surprise and showed some kind of revival. However, it was not a broad-based revival; it was driven by rural consumption and government capex towards the end of the financial year. Because it was not broad-based and the external environment is becoming more challenging and uncertain – Liberation Day was in April – this is the time when you need to build policy actions which will protect the growth sentiment and build momentum.

The change in the stance to neutral caught everyone off-guard, with the MPC saying there is very limited space to support growth going forward. Should we rule out rate cuts now?

The way inflation outlook is shaping will determine the future course of action. The RBI Governor, in a recent interview, has clarified that. It depends upon what kind of inflation you have because you need to have a certain real rate of interest. If that becomes negative, then savings will not be incentivised.

Assuming that 1.5 per cent is the real rate of interest you want to preserve, then the floor (for repo rate) with inflation rate would be 5.5 per cent. However, if inflation goes to 3 per cent, then you have additional room to manoeuvre. Therefore, it really depends on the dynamics of the inflation and growth numbers.

With the MPC changing its stance to neutral from accommodative so quickly, is monetary policy adding to the already-uncertain environment?

I wouldn’t say that. Strictly speaking, the stance is not within the purview of the MPC. But we, of course, make some observations. I think it was purely the fact that with the 50 bps rate cut, the room (to cut further) going forward is limited. In view of that, it was a step to manage expectations.

The uncertainty surrounding us is another factor to keep the stance neutral, which gives you more freedom to go either way. Although the inflation numbers up to May are looking very good, with oil prices shooting up due to the Israel-Iran conflict, you never know what is in store. So, a neutral stance allows you freedom to adjust your actions. Since the MPC’s decision on June 6, a lot has changed. We live in a very dynamic world, and that is why we need to be cautious.

Are lower interest rates needed when circumstances are uncertain?

When circumstances are uncertain and you want to promote growth, you try to reduce the cost of capital to make it easier for the entrepreneur who is sitting on the fence on whether to invest or not. That is what it does at the margin.

Ultimately, investment decisions are a very complex process. But the cost of capital is one of the factors which is weighed by the entrepreneur, and policymakers try to assist the process. By lowering the cost of capital and trying to push demand, you are creating more favourable conditions for an investment decision than before.

For Indian businesses, there seem to be two hurdles: the global uncertainty as well as weak urban demand. Is lower cost of capital reason enough for the private sector to invest?

As I said, making an investment decision is a very complex process and cost of capital is only one of the factors. You can only exercise the levers which are within your control. You can’t really do much about global uncertainty. What Mr Trump does on a day-to-day basis is something you have no control over. But holding other things constant, these (such as lowering the cost of capital) are some of the things which we can do something about.

The other could be a fiscal stimulus which may be helpful to revive demand. The government has budgeted for a very substantial capex. So, frontloading the capex to keep the momentum up while things settle down in the international market could be another thing that could be done.

Countries are trying to conclude trade agreements very quickly at the moment. Even if done in phases, could these quick agreements be sub-optimal?

Well, they are reacting to the changed times. We are now in a situation where the multilateral framework for trade has been completely put aside. MFN (Most Favoured Nation) – which has been the bedrock of multilateralism – has also been thrown out the window because Mr. Trump has X rate for China, Y rate for India, Z rate for Europe. The dispute settlement mechanism of WTO has been abandoned for some time because the Appellate Body was not renewed.

In normal times, you don’t have that urgency and you negotiate in a very relaxed manner. But when you need to, you find ways to expedite the process. That is what is happening. There is a realisation that we need to seize the moment and close these deals quickly before the damage is done, to protect and preserve our economic interests in the best possible manner. Sooner we do that, the better it is. Then the uncertainty that is prevailing is cleared.

Yes, some of these are the early harvest type of arrangements, and they will continue to be negotiated. But normally in trade negotiations, you know what you can do for a large part of the agenda and only a small part, maybe 10-20 per cent, holds up progress. So, the best way forward is to move ahead with the part of the agenda on which you have no issues and find ways to address the red lines.