Repo rate one of many factors to revive growth: MPC Member Nagesh Kumar

In particular, there was a concern about the weaknesses of the manufacturing sector, which is important for job creation due to subdued urban consumption & slow growth of private investments, he said

After a gap of almost five years, the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC) lowered the policy repo rate during the February meeting. MPC member NAGESH KUMAR discusses the rate cut rationale and the future rate trajectory in an email interview with Manojit Saha.

 

What is the rationale behind the repo rate cut? 

The backdrop for the MPC decision to cut the repo rate by 25 basis points was provided by the need to support economic growth momentum and the elbow room provided by the moderation of inflationary pressures. The NSO’s First Advance Estimates put the economic growth rate for 2024-25 at 6.4 per cent compared to the RBI’s projection of 7.2 per cent during the October 2024 policy. This means an 80 bps downgrading in a matter of four months.

 

In particular, there was a concern about the weaknesses of the manufacturing sector, which is important for job creation due to subdued urban consumption and slow growth of private investments. The challenging global economic environment with the threat of major trade wars erupting also does not bode well for the manufacturing sector.

 

On the other hand, Consumer Price Index (CPI) inflation rate coming down to 4.3 per cent in January from 6.2 per cent in October 2024 provided an opportunity to support the economic growth with the reduction of the repo rate by 25 bps. 

 

What is the chance of future rate cut, given headline inflation expected to align with target?

  The future action would depend on the evolving growth-inflation dynamics. There are possibilities of global commodity prices softening due to several factors. The crude oil prices are likely to head downwards due to the Chinese slowdown, the recently announced ceasefire in the West East, with the prospects of the Ukraine conflict also brightening in the Trump 2.0 Presidency. This is also likely to enhance the US output of oil and growing dependence on renewables.

 

Will the rate cut be enough to revive the economic growth?

  Recovery of economic growth is determined by several fiscal, monetary policy, and external factors, such as fiscal stimulus through public investment, tax rates that determine disposable incomes, and external factors that have a bearing on export demand for Indian goods, among many other factors including policy rates and liquidity management. Therefore, the repo rate is only one of many factors.

 

Will there be more rate cuts or liquidity boosting measures?

  One will have to wait and see how the growth–inflation dynamics evolve between now and the April policy. The same applies to liquidity management measures such as CRR. The views expressed are in my personal capacity and should not be attributed to RBI or the MPC.