Room for further cut in policy rate, but time not opportune: RBI Governor

The RBI raised its gross domestic product (GDP) growth projection for the current financial year (FY26) by 30 basis points to 6.8 per cent, from an earlier estimate of 6.5 per cent, while it slashed inflation forecast by 50 bps to 2.6 per cent as against an estimate of 3.1 per cent.

Malhotra, in the minutes, said the benign outlook for headline and core inflation as a result of the downward revision of projections opens up policy space to further support growth.

However, several growth-inducing policies unveiled by the government and the Reserve Bank should help growth going ahead.

“The cumulative impact of fiscal and monetary measures is yet to be realised fully. Tariff-related uncertainties are still evolving. There is elevated uncertainty on the external front. In view of these factors, even though there is policy space to further cut the policy rate, I feel this is not the opportune time for the same as it will not have the desirable impact,” the minutes said, quoting Malhotra.

“The policy uncertainty, rapidly evolving developments and the foggy outlook suggest that we exercise caution and take a view for each policy as per
the then prevailing macroeconomic conditions and outlook,” he wrote.

RBI Deputy Governor Poonam Gupta said slower growth in second half and a benign inflation rate have potentially opened some space for lowering the policy rates further. However, it’s difficult to vote for a rate cut at this juncture, she wrote in the minutes.

“While the recent measures announced by the government have significantly bolstered consumer sentiment, these measures are still working their way through. It would be prudent for the impact of these measures to be sufficiently realised before taking another supportive measure right away,” she said.

The policy rate cuts announced so far in this calendar year are still being transmitted through the system, and a rate cut at this time may only be marginally effective, she said.

“The global uncertainties are evolving at a very fast pace. Depleting policy ammunition at this point does not seem warranted until there is more clarity on how the global policy environment will unfold henceforth,” Gupta said.

She also noted that changing the stance to accommodative is not required as the neutral stance does not prevent the MPC from reducing the repo rate when warranted.

One of the external MPC members, Nagesh Kumar, said that the robust GDP growth of 7.8 per cent in Q1 FY25, which resulted in the upward revision in growth projection to 6.8 per cent, does not factor in the shock that India has faced after the first quarter.

“The economic growth trajectory and projection suffer from possible discontinuities,” he wrote in the minutes. Kumar said that private investment has continued to remain sluggish, despite healthy growth of profits and profit margins, and capacity utilisation rates staying above the 75 per cent level, perhaps due to the trade policy uncertainties. Hence, there is no room for complacency as the future looks uncertain because of external shocks.

The trade policy measures adopted by the US pose challenges for the economy. While the effect on the economic growth rate may be limited to between 40-60 bps, a larger effect is expected on MSMEs and jobs, he said. Kumar voted to change the policy stance to accommodative.

Another external MPC member Saugata Bhattacharya said that a moderation in the inflation rate is not a compelling reason, at this point, to cut the policy rate.

The MPC’s external member Ram Singh said that the inflation trajectory looks benign at least for the next two quarters. However, the prevailing inflation rate is too low — it is neither conducive for businesses nor for public finances, he said.

According to him, when the impact of the demand boost from the 100 bps cuts in repo rates this year is yet to play out fully, a further rate cut today runs the risk of an overdose.

Monetary Policy Committee member and Reserve Bank of India Executive Director Indranil Bhattacharyya said that the current ultra-low levels of inflation should be seen as a transitory phenomenon, and monetary policy has to be cognizant of potential demand pressures over the medium term generated by the cumulative impact of past monetary and fiscal measures.