Stance change means possibilities of more rate cuts: MPC's Nagesh Kumar

Kumar says that the impact of reciprocal tariffs imposed by the United States (US) is mixed and there is fiscal space to support public expenditure

Nagesh Kumar, external member of the Reserve Bank of India’s (RBI’s) monetary policy committee, says, in an email interview with Manojit Saha, the impact of reciprocal tariffs imposed by the United States (US) is mixed and there is fiscal space to support public expenditure. Edited excerpts.

 

The monetary policy committee (MPC) has cut the policy repo rate twice, in February and April, to 6 per cent. The stance in the April policy was changed to “accommodative”. Do you think there is more space to cut interest rates?

 

The recent decline in the headline inflation rate has created the policy space for monetary policy action. The consumer price index rate was 3.6 per cent in February, down 70 basis points from January, due to a sharp reduction in vegetable prices, which have seen nearly a 39 per cent correction since November 2024. Inflationary expectations remain well anchored. Furthermore, the declining prices of crude oil and other commodities, with subdued global demand and normal monsoon predictions for 2025-26, suggest the headline inflation rate will remain within the target range of 4 per cent. This provides the headroom for adopting a more accommodative monetary policy. [BLURB]

 

The RBI started the normalisation of monetary policy at the February 2025 MPC with a 25 basis point cut in the repo rate. It continued with a similar cut in April. This means possibilities of more rate cuts as required. India has huge forex reserves along with robust macro fundamentals.

 

What are India’s trade prospects owing to the United States’ reciprocal tariff?

 

For India, the (Donald) Trump tariffs are a mixed blessing. The 26 per cent applied to Indian exports is somewhat lower than that imposed on its Asian peers, especially China and Vietnam. They may increase India’s export share in the US. They may also hasten the restructuring of supply chains away from China, and some may find India a good base. However, India may face competition in other markets like the European Union (EU) and United Kingdom (UK), besides its domestic market, where Chinese companies would dump their products. With huge excess capacities and deep pockets, the dumping of cheap goods in different markets has become a real threat. Thousands of factories in several countries in Southeast Asia, like Thailand, have shut down because of this. India needs to take action to protect domestic industry, especially in labour-intensive consumer goods like garments, imitation jewellery, non-leather footwear, toys, and furniture, in which dumping is rampant. In addition, the ongoing free-trade negotiations with the EU and UK need to be concluded quickly. Furthermore, it remains to be seen how negotiations on the India-US bilateral trade agreement (BTA) proceed. India faces pressure to open up its markets for highly subsidised American food products.

 

The government has shown the resolve for fiscal discipline. Do you think there is fiscal space to support economic activities?

 

We need to monitor global trends and take action as required, including stimulating private consumption and investment through fiscal and monetary policy. India has the policy space for both fiscal as well as monetary policy action. The Union Budget has augmented the fiscal space by limiting the fiscal deficit from 5.6 per cent (actual) in 2023-24 to 4.8 per cent in 2024-25 (against the budgetary estimate of 4.9 per cent) to just 4.4 per cent in 2025-26. This has been achieved while sustaining the momentum of public investment. Therefore, there is fiscal space for enhancing public expenditure if the situation warrants.

 

What could be the impact on world trade due to the tariff wars?

 

There is a risk of the world economy getting into a prolonged recession because of trade wars and protectionism, which would also adversely affect India’s growth prospects. The World Trade Organization (WTO) has warned about the negative outlook for international trade. Global GDP (gross domestic product) growth projections for the current year are likely to be lowered. The International Monetary Fund (IMF) in its April 2025 World Economic Outlook has downgraded the global economic growth rate in 2025 by 80 basis points to 2.8 over January 2025.

 

Do you think foreign direct investment (FDI) in India will be adversely impacted?

 

Global uncertainties and the trade war have started affecting India’s economic outlook for the year. Despite a healthy improvement in the rates of capacity utilisation and sales growth of manufacturing companies in the last quarter of 2024-25, investment intentions of private corporations were estimated to have moderated in the same period. Global uncertainties are likely to affect FDI inflows and private capex. The April 2025 IMF projection for India for 2025 is 6.2 per cent, which is 30 basis points lower than the RBI forecast for 2025-26 of 6.5 per cent.

 

Do US tariffs on China give an opportunity for India?

 

India may come out of the ongoing trade war in good shape while remaining the fastest-growing economy. For instance, if we can make use of the relatively low reciprocal tariffs (and through successful BTA negotiations), it may be possible for India to attract the value chains moving away from China, deepen its integration with the US economy, and contain the possible damage due to dumping by China in the domestic market. However, the necessary ammunition to support economic growth is available.