Rate cut would help revive economy without worsening inflation, says MPC member Nagesh Kumar

Given that the growth has been sluggish, do you believe a 50 bps reduction in the repo rate at this point in time would be a more effective step to stimulate the economy? Do you think RBI is behind the curve in cutting rates and boosting growth?

To some extent the sharp growth slowdown in Q2 was transient. We should expect an improvement in growth in the coming two quarters. The government capex, which saw a squeeze in the first quarter, has begun to revive in the second quarter and should gain momentum in the third and fourth quarters. The government capex should, therefore, help to lift the growth rate in the second half of the year. Yet, there is a slowdown from the earlier projections of growth around 7 per cent or higher to around 6.5 per cent. I believe that it needed a policy response because it largely reflected the slow-down of the manufacturing sector. The agriculture growth rate actually improved from 2 per cent in Q1 to 3.5 per cent in Q2 and the services sector was still posting a robust growth rate of 7 per cent (even though slight moderation from 7.7 per cent). The deceleration of manufacturing growth from 7 per cent to just 2.2 per cent was rather sharp.

A reduction of the cost of capital through a reduced repo rate could help to revive the growth of private investment besides consumer demand. Keeping in mind the deceleration of the manufacturing sector, I made a case for a 25-basis point cut in the repo rate to start the cycle of normalizing the monetary policy. In addition I made a case for a 50-basis point cut in CRR, to help enhance liquidity. Expanding the manufacturing sector could also help in containing inflationary pressures by enhancing the supply capacity.

You said monetary policy has limitations in addressing inflation largely driven by a supply-side shock. What measures can address supply-side shocks?

The inflation hitting a high rate of 6.2 per cent is also a challenge. However, the bulk of the inflation is accounted for by the food, especially those of vegetables, namely tomatoes, onions, and potatoes (TOP). Excluding food, the CPI headline comes down to just 3.1 per cent in October 2024. Keeping in mind the easing of vegetables and edible oil in November, food inflation should be easing further in the coming months.

I have argued in my statement that while looking at the policy options for reviving growth and containing inflation, one should factor in their determinants. This is because monetary policy instruments such as interest rate changes have more to do with demand management and have limitations in addressing the rising vegetable prices, which are primarily due to a supply-side shock, namely seasonal demand-supply mismanagement, which was beginning to correct itself in November. However, the inflation-targeting framework of MPC is currently focused on addressing the headline inflation based on CPI, which includes food as well as non-food items.

Therefore, I believe that a rate cut would help in reviving economic growth without worsening the inflationary situation, which may soften with seasonal correction in prices.

Rupee has breached 85 level. How big a concern is a depreciating currency?

The Indian rupee is depreciating vis-à-vis the US Dollar, which is strengthening against different currencies in nominal terms. In real terms, the rupee is actually appreciating, as a recent RBI paper has shown.

If the US Fed slows down rate cuts, will it impact emerging economies like India?

We are living through highly uncertain times with upcoming changes in the economic and trade policy in the US with the change of administration in January, the ongoing geopolitical conflicts, which have a bearing on the oil prices, exchange rates, etc. The MPC will factor in the trends of the past months and projections for the future when it meets next to arrive at its decisions. We look at the trends in monetary policy over the past two months. The impact of the transition in the US government is a guess as of now. One has to wait and see how the new government will act.

The MPC meeting in February will take stock of how the inflation-growth balance was shaping up between now and then against the backdrop of global trends. Most central banks around the world, barring a few, have embarked on a cycle of normalizing the monetary policy in recent months. The US Fed has cut the policy rate by 100 basis points in three rounds. While we do not have to follow what other central banks do. But if we do not follow the process of normalisation when most others have moved forward, we run the risk of currency appreciation. India needs to guard against the risks of currency appreciation in real terms as it would hurt the competitiveness of Indian products.

There is a debate on the exclusion of food from the inflation-targeting framework? Can you please share your views on this?

There is indeed a debate on whether food should be excluded. It was raised in the Economic Survey 2024, besides several economists expressing their opinions.