Future policy actions dependent on growth-inflation dynamics: Nagesh Kumar

Hopefully, the penal tariffs for Russian oil purchase will be withdrawn, and the ongoing bilateral trade negotiations will succeed in eventually bringing down the US tariffs on Indian exports to more

Nagesh Kumar, member of the Reserve Bank of India’s (RBI’s) Monetary Policy Committee (MPC), says while the benign inflation outlook provides policy space, one has to watch how trade policy uncertainties play out, in an email interview with Manojit Saha. Edited excerpts: 

You have observed in the MPC minutes that the benign inflation outlook provides policy space. How much space do you see for further easing? 

The repo rate has been lowered three times since the February 2025 MPC meeting, bringing the total reduction to 100 basis points (bps), to support economic growth. Transmission of the repo rate cuts to lending and deposit rates happens with a lag. However, the transmission was accelerated by the hefty 50-bp cut in the June 2025 policy. So far, overall, lending rates have come down by 71 bps, and deposit rates by 87 bps for fresh loans and deposits. 

Given the lag in transmission, further softening of lending rates may happen in the coming months, especially since liquidity remains in surplus and the effect of the cash reserve ratio cut is being transmitted. While the case for stimulating private investments and urban demand remains, and the benign inflation outlook provides policy space, one has to wait and watch how the transmission of existing actions plays out and how trade policy uncertainties evolve before considering future policy moves. In other words, future policy actions will depend on the evolving growth-inflation dynamic. 

You have noted in the MPC minutes that private investment is adversely impacted due to trade-related uncertainties. What should India’s policy response be to spur private investment? 

Private investment sentiment has been adversely affected by trade policy uncertainties caused by the US announcement of 25 per cent tariffs on India, along with additional 25 per cent penal tariffs for buying Russian crude. 

Negotiations for a bilateral trade agreement are on, although currently paused. Important diplomatic initiatives taken by the US President to stop the Ukraine war are also in progress. These initiatives may have implications for the tariff rates that will apply to India’s exports to the US, as well as for the imposition of penal tariffs on India for buying Russian crude. Naturally, investors would prefer to wait for greater clarity on the tariffs that will ultimately apply to India’s exports. 

How will the US tariffs impact domestic growth? 

The US tariffs on India are causing a lot of anxiety. However, since the Indian economy is primarily driven by domestic consumption and investment, and less by exports, the issue is less about growth rates and more about potential job losses and the effect on micro, small, and medium enterprises (MSMEs). This is because the US is a major market for India’s exports of labour-intensive goods such as textiles and garments, leather goods, gems and jewellery, shrimp, and other food products — all dominated by MSMEs. 

Hopefully, the penal tariffs on Russian oil purchases will be withdrawn, and the ongoing bilateral trade negotiations will succeed in eventually bringing down US tariffs on Indian exports to more manageable levels, broadly in line with, if not better than, Asian peers such as Association of Southeast Asian Nations countries and Bangladesh, and the disruption will be short-lived. 

Going forward, diversification of export markets will be important. In that context, negotiations on the India-European Union free trade agreement (FTA) need to be expedited, and the FTAs or comprehensive economic partnership agreements with Japan and the Republic of Korea need to be reviewed to make them more effective, especially for labour-intensive exports. India also needs to fully harness the potential of other FTAs, such as those with Australia, the United Arab Emirates, and the UK.