Policy interest rate consistent with macroeconomic stability, says RBI MPC member Saugata Bhattacharya

What is your outlook on the economy given the uncertainty on external fronts, including US tariffs?

Let me begin with the disclaimer that I speak for myself, not the MPC (Monetary Policy Committee). The forecasts in the MPC resolution for GDP growth and inflation over the next few quarters is the path I will be guided by for policy decisions. The median forecasts of the Survey of Professional Forecasters (SPF) are a very credible supplement. The MPC resolution forecasts growth to gradually moderate to 7 per cent in Q3, 6.5 per cent in Q4, with full FY26 growth at 7.3 per cent. There will be an upside even if a framework trade agreement with the US is signed, as it would boost economic confidence before actual trade benefits kick in.

Are you confident that supporting growth at this stage will not reignite inflation, especially given risks from imported inflation, volatile crude prices and a weaker rupee?

At present, there are little, if any, signs of the economy “overheating”. Manufacturing output for many quarters has been at capacity utilisation levels (of nearly 74-75 per cent), which are lower than around 80 per cent I have seen in the past, giving pricing power to producers. In addition, merchandise imports suggest that external supply is also adding to this ‘overcapacity’. Metal prices remain stable, and crude oil is still expected to hover around $60 a barrel, barring geopolitical shocks.

After the repo rate was cut by 25 bps to 5.25 per cent earlier this month, will benign inflation create room for additional rate cuts, or do you think the space of further easing has already been exhausted?

Given the persisting uncertainty, it is difficult to provide forward guidance on the policy rate path. The decision at each meeting will be based on the available data, evaluating the emerging risks, and proceed meeting by meeting. Pending incoming data, I believe the policy interest rate is now consistent with ‘macroeconomic stability’, which is a formal way of saying that multiple economic indicators are forecast to gradually move to normal levels over the next few quarters. Hence, the present monetary policy is appropriate.

Do you think the recent rupee depreciation has raised the risk of imported inflation? What worries you more today — imported inflation, sluggish investments or rising trade deficit?

The effect of rupee depreciation is a complex issue. This will have increased over time the landed domestic costs of both intermediate and final products.

The immediate effects on prices are difficult to estimate, since import prices are usually based on longer term contracts rather than the immediate dollar/rupee rates. These prices will feed in over the next few months. And the feed-through of these input costs will need to be closely monitored.

Economic outcomes are interlinked. For example, the risk of imports from China aggravating domestic industrial capacity is only one of multiple inputs into a domestic investment decision. Many rigorous academic articles, for instance, have reached divergent conclusions on the elasticity of exports to currency depreciation.

With inflation likely to remain soft and growth expected to moderate in H2, are more steps required to further support the economy?

There has been a coordinated response of multiple policy instruments and measures to stimulate growth and investment — fiscal, monetary, industrial, trade, labour, and many others. Each measure has a specific set of objectives which complements the others. We need to monitor the outcomes of these measures on the behaviour of economic agents before deciding the path and scope of further actions.

GDP growth in H1 FY26 had been unexpectedly high, primarily due to the effects of lower-than-forecast CPI and occasional negative WPI inflation. This had resulted in ambiguities in the interpretation of underlying economic activity. Now that inflation is forecast to gradually normalise towards the target over the next few quarters, GDP growth ‘prints’ will also slow down in line with the forecasts in the MPC resolution. High-frequency indicators suggest a slight moderation in economic momentum, but these were largely trade-related, and even that seems to be transient.

How vulnerable is India to sudden global shocks such as a sharper-than-expected US slowdown or an abrupt unwinding of the yen carry trade? Does the MPC have adequate policy buffers?

In the rate-setting decision process, the overall ‘external balance’— the totality of India’s merchandise and services trade, foreign remittance inflows and outflows, foreign direct investment (FDI) and stock market flows — is an important input. Since India now largely allows free movement of funds overseas, domestic monetary policy decisions remain subject to the constraints of the so-called “Impossible Trinity”, that one has to choose 2 of 3 objectives: one, free foreign exchange inflows and outflows, second, let the rupee find its own level against the US dollar rather than a fixed level and, third, allow the MPC to set the policy repo rate at an appropriate level.

While the general principles are well known, the devil is in using the limited available operational instruments to get the best possible outcome. The RBI, in my opinion, has done a wonderful job in deftly balancing these objectives, given its constraints. The RBI’s responses, always proactive, have opened space for MPC to cumulatively ease monetary policy without resulting in undesirable unintended consequences, which has kept India’s economy on an even keel in a very challenging external environment.