Private capex not showing robust signs of revival, says RBI MPC member Ram Singh

Edited excerpts:

The MPC’s decision on June 6 to tighten its stance to neutral while cutting the repo rate by 50 bps led to some confusion. Has the decision to shift the stance so quickly added to the uncertainty?

Our decisions were guided by data and domestic priorities. Since the April meeting of the MPC, inflation prints have turned out to be significantly better than forecast, lowering the expected headline inflation rate to 3.7 per cent. Food price inflation is also expected to remain moderate. This created a unique opportunity for us to plan ahead and think of how much of a rate cut is possible in this cycle. Our and market’s assessment was that there is enough room for a 50 bps cut in this cycle. The only question was whether we go for a 50 bps cut in one go or stagger it. Given that the actual inflation prints were lower than expected and a more-than-benign outlook, timely onset of monsoon, and stable commodity prices outlook, MPC decided to go for a 50 bps cut to boost demand and growth.

Urban demand and demand for housing, vehicles, and other goods that are sensitive to interest rates are not at a level we would like them to be. Due to this, private capex is not showing robust signs of revival. Private capex as a ratio of the net operating margin remains low. The pace of banking credit to corporates is another indicator. In recent times, corporate debt has seen very little increase. So, the debt-to-equity ratio has been falling. Companies have chosen to use their cash not as a leverage to make investments in production lines but to distribute it as dividend or invest in some form of equity. Whichever way you look at it, private capex remains low compared to what is required for a 7-8 per cent growth rate. It is in this context that we thought of delivering a 50 bps cut. A pick up in broad-based demand is required for private investment to pick up.

The MPC’s decision to change stance was needed in view of the persistent and heightened tariff related uncertainty and the highly fluid geopolitical scenario. The neutral stance gives the RBI an additional degree of freedom to respond to unforeseen contingencies. Depending on the situation, the MPC has the option of pausing, decreasing, or hiking the rates. In fact, the events post June 6, specifically the Iran-Israel conflict and concerns over the Strait of Hormuz, underscore the utility of the neutral stance.

In your statement in the minutes of the meeting, you said there is scope for a 75 bps cut in this cycle without overheating the economy. Does that mean there is still room for a 25 bps cut despite the change in stance and what has happened globally since June 6?

The change in stance does not mean it’s the end of the rate cutting cycle and that rate hikes are next. Even after considering the recent geopolitical situation and its possible impact on oil, gold, and fertiliser prices, headline inflation this fiscal year is likely to remain in the comfort zone of below 4 per cent. However, having reduced the repo rate by 100 bps in the span of six months, from now on we have to be cautious on account of a fluid geopolitical situation and uncertainty over tariffs. Also, we have to assess the pace and extent of transmission of rate cuts for borrowers and investors. Therefore, the MPC must look at the incoming data carefully while taking a call on interest rates.

Here, the market – especially the bond market – has overreacted. A neutral stance does not take away the freedom of interest rates remaining the same or of a further cut; it only gives us one more degree of freedom. If something unexpected happens 1-2 months down the line, we already have the comfort of having reduced interest rates substantially. So, the idea was to add a degree of freedom to the RBI’s choices. It is not even an indication of the likelihood of rates going up. Those odds do not change. It’s just that given the order of uncertainty, an additional degree of freedom is not a bad idea.

What is the overall message coming from the MPC’s jumbo rate cut combined with a change in the stance?

The message for borrowers, investors, and lenders is that it’s a good time to make your decisions and act on them.

Since June 6, we have seen inflation fall to 2.82 per cent in May. Economists expect it to fall to maybe 2-2.1 per cent in June. Are these the sort of conditions which create room for further easing?

In spite of global headwinds, we have a cushion of around $700 billion in terms of foreign exchange reserves. And except for gold and petrol, the outlook for commodity prices is fairly benign. The RBI’s inflation forecast is 3.7 per cent for 2025-26. If actual prints support a lower inflation forecast, it will generate additional elbowroom for rate cuts, certainly. Or, if we observe any stress on the growth front, that will also be a consideration.

Where do you see growth faltering? Or is it just private capex and urban demand that are concerns at the moment?

These two and the developments on the exports front. I would like to add that I am optimistic about achieving 6.5 per cent growth this year. I expect the base effect to be favourable. Last year, growth rate in the first half was slower as the Centre could not meet its infrastructure investment targets on account of elections. As the public investment pace is at an all-time high, in the first half of this financial year I would expect growth to pick up on this count. In the latter half of the year, if credit growth picks up as we are hoping, that should put us in a comfortable zone vis-à-vis the 6.5 per cent forecast.

You said in your statement in the minutes that GDP growth is below the aspiration of 7-8 per cent. Is that range in line with your estimate of India’s potential growth rate?

Yes, we are capable of clocking 7-8 per cent growth rate. Ipso facto. If you look at the last 10-11 years, the growth rate has been 6.8 per cent or higher in eight years. Excluding the Covid years – 2019-20 to 2021-22 – the average turns out to be well above 7 per cent. That shows we have the potential to grow at least at 6.5 per cent, if not more.

During the last several years, core inflation has been less than the headline inflation, so capital goods inflation has been noticeably less than the GDP deflator. This, in turn, means that real investment as a ratio of real GDP is higher than what is claimed in the common discourse. The Centre’s massive investment in infrastructure and logistics and technological advances have significantly boosted productivity of capital. Due to increased productivity, you need only half the capital to produce an additional unit of output. According to reports, ICOR (Incremental Capital Output Ratio) – which was 7.5 in 2011-12 – was 4.4 in 2022-23. All this makes me confident that we have the potential to grow at more than 7 per cent, with monetary policy providing a supportive hand.

You also mentioned in the minutes that banks’ Net Interest Margins (NIMs) coming under pressure could be neutralised by other policy instruments of the RBI. Does the RBI and MPC need to look at banks’ profitability?

I agree that the RBI should not be too worried about a fall in banks’ NIMs. However, banks are very important in our economy as we do not have a rich bond market. The equity market is also developing. So, it’s important to keep banks’ interests in mind. If banks feel that transmission of rate cuts is going to pressure their NIMs, there can be attempts to delay, stagger, or undermine the transmission process. Therefore, the RBI’s decision to reduce the Cash Reserve Ratio by 1 percentage point is a prudent decision. As banks will have more capital to lend and make money, now the impact of rate cuts on NIMs should not be a reason why they delay or undercut the transmission process.