'Present policy rate & stance well positioned for macroeconomic stability'

Saugata Bhattacharya, external MPC member, spoke on the scope for further rate cuts and how the RBI's foreign exchange market interventions could influence the policy path going forward

After the release of the minutes from December’s Monetary Policy Committee (MPC) meeting -- at which all six members voted unanimously for a 25-basis-point rate cut  -- Saugata Bhattacharya, an external member of the panel, spoke to Subrata Panda about the scope for further easing and the role of the Reserve Bank of India’s (RBI’s) foreign exchange market interventions in shaping the policy outlook. Edited excerpts: 

Is there room for further rate cuts, or has the current easing cycle reached its end? 

Let me begin with the disclaimer that I speak for myself, not the MPC. Given the persisting uncertainty, it is difficult to provide forward guidance on the policy rate path. Decisions at each meeting will be based on the available data, evaluating the appropriate balance of risks. 

Where do you see the terminal policy rate settling in this easing cycle? 

Based on the current information set, I believe the present policy rate and stance are well positioned for macroeconomic stability. However, this view may change as the economic environment evolves. 

What would prompt a shift in the policy stance from neutral to accommodative?

 

Given the forecast growth and inflation paths, and the overall macroeconomic balance, only severe adverse shocks to growth are likely to result in a change in the stance to accommodative. Even then, this would probably be redundant, since a neutral stance is consistent with further monetary policy easing.

 

Is ultra-low inflation necessarily healthy for the economy? And how important is nominal GDP growth alongside real growth?

 

Prices are a very important incentive and determinant of economic decisions, as we know from Econ 101. The 4 per cent target for CPI inflation was set after due deliberation as optimal for stable economic growth. Any significant deviation, up or down, distorts economic incentives for production, investment, consumption and savings and distorts the macroeconomic balance. The 4 per cent CPI inflation together with an appropriate WPI inflation consistent with this rate determines the deflators which result in optimal real and nominal growth.

 

All MPC members appear to agree that growth is slowing in Q3. Are the cumulative effects of GST cuts, income tax reductions, and the policy rate cuts yet to reflect in growth?

 

GDP growth in H1 FY26 had been unexpectedly high, primarily due to the effects of lower than forecast CPI and occasional negative WPI inflation. This had resulted in ambiguities in interpretation of underlying economic activity. Now that inflation is forecast to gradually normalise towards the target over the next few quarters, GDP growth “prints” will also slow in line with the forecasts in the MPC resolution. High frequency indicators suggest a slight moderation in economic momentum, but these were largely trade related and even that seems to be transient. If the external balance continues to remain weak, this is likely to be offset, over the next few quarters, by the various policy stimulus measures.

 

Do you believe monetary policy has done the heavy lifting, and that the onus of supporting growth now lies with fiscal policy?

 

It’s not just a single policy; there has been a coordinated response involving multiple policy instruments and measures to stimulate growth and investment -- fiscal, monetary, industrial, trade, labour, and many others. Each measure has a specific set of objectives that complements the others. We need to monitor the outcomes of these measures on the behaviour of economic agents before deciding the path and scope of further actions.

 

How significant a concern is the depreciation of the rupee? Does the RBI’s intervention risk drain liquidity from the system?

 

The external balance, particularly the capital account, has been a source of some concern, given the significant re-orientation of global supply chains and asymmetric tariffs on our trade competitiveness. RBI interventions in the currency markets to smoothen volatility have led to some liquidity drain. However, the RBI has been very proactive and forward looking in managing system liquidity. It has maintained an ample supply of short-term and durable liquidity to keep short-term money market rates close to the policy rate, denoting a balance in the supply of loanable funds.

 

Does aggressive foreign exchange intervention constrain the space for further rate cuts, or can the two operate independently?

 

It’s not so much forex market operations. Domestic monetary policy formulation is constrained by the well-known “impossible trinity” of open economy macroeconomics. The RBI and the government, to their credit, have been quite successful in keeping space open for monetary policy easing in the face of a challenging external environment, not just through currency interventions, but also appropriate and forward looking liquidity infusions, calibrated easing of regulatory and foreign capital restrictions, FDI measures, and trade agreements.

 

You have expressed concerns about the adverse impact of lower interest rates on household savings behaviour, and consequently on bank deposits. Would further rate cuts impair banks’ ability to mobilise deposits and, in turn, affect credit growth?

 

As a broad principle, given other economic signals remaining stable, lower interest rates are likely to adversely affect individual savings behaviour. It is difficult to give a precise estimate of interest rate thresholds at which savings, particularly of households, will perceptibly fall. Financial institutions will still retain access to resources to fund credit growth, but the cost of these funds will increase. At least some part of this increase will be shifted to the borrower, which will impair credit demand. This problem has become exacerbated at present due to foreign savings having become more constricted and expensive.