RBI MPC: No reason to believe rate cut will not be growth-inducing

Governor Sanjay Malhotra says front-loaded policy easing and stable inflation outlook will support credit growth, while tariffs and global shocks pose limited risks to India's economy

Reserve Bank of India Governor Sanjay Malhotra, along with Deputy Governors Poonam Gupta, T Rabi Sankar, Swaminathan J, and M Rajeshwar Rao, responded to a range of issues during a media interaction after the monetary-policy announcement. Edited excerpts:

 

You have retained the growth forecast for this financial year at 6.5 per cent. How much of the tariff impact have you factored in?

 

Malhotra: You are well aware that we had already reduced our growth forecast, which was earlier 6.7 per cent, to 6.5 per cent. Some of the global uncertainties have been reckoned on in the revised growth forecast. However, there is still uncertainty and it is difficult to predict what the impact will be. We will maintain a very, very close watch on the incoming data and take a call. As of now, we do not have sufficient data to revise our GDP (gross domestic product) forecasts.

 

 

Is the RBI worried that tariffs will push up prices because imports will become expensive?

 

Malhotra: In India we are less dependent on the outside world as far as inflation is concerned. If at all there is an impact, there is also an impact on growth and demand. That has a reverse effect. We do not see a major impact of this unless we have retaliatory tariffs and so on, which I really do not foresee. 

 

Gupta: Nearly half our inflation basket consists of food, which is not affected directly by global developments. A significant part consists of non-tradables, which again are not impacted by worldwide factors. So, to that extent, the first-order direct impact of these evolving uncertainties on India's inflation is likely to be limited.

 

Given that you have substantially reduced the inflation forecast to 3.1 per cent, what stopped the MPC from doing another rate cut? Also if you can shed some light on whether the monetary policy is effective in pushing up loan growth, which continues to be tepid despite a 100 basis point rate cut?

 

Malhotra: We did, first of all, a front-loaded rate cut, 100 basis points, over a short period of four months, February to June. Transmission is happening and uncertainties still continue.

 

We will keep evolving an outlook on our macroeconomic conditions. The MPC will, accordingly, take a view on our policy in successive meetings.

 

Insofar as the impact of rates is concerned, I have given figures in the statement. It is about 71 basis points on bank credit rates until June within a period of four months. Of that about 55 basis points is because of the change in the rate and not because of the change in the mix of the credit loans. So, that has happened and obviously that will certainly help not only growth in credit but also it will impact the real economy. As you are all aware, it happens with a lag this time while the rates have of course come down significantly faster. The impact on the real economy will start. So, there is no reason to believe that this will not have a growth-inducing impact.

 

Housing-loan growth has slowed. What do you think is the reason for this?

 

Malhotra: Housing credit is doing well. It may have moderated somewhat, but that is to be expected. I think overall housing credit growth is 14 per cent as we speak, which is good and more than our average credit growth rate of about 10 per cent that we are having this year. Some of the impact happens with a lag.

 

If India has to stop purchasing Russian oil, how will it impact inflation?

 

Malhotra: It’s not only Russian oil that we are buying. We are buying oil from many other countries. We don’t see any major impact on inflation because of this. The government will take an appropriate decision on the fiscal side in case there is any shock. 

 

Do the FY27 consumer price inflation (CPI) estimates take into account any changes in the weighting of the CPI basket, which is expected in February?

 

Malhotra: No.

 

How will the tariff on India impact foreign flows into the country?

 

Malhotra: Foreign flows depend on a number of things -- the current account and capital account. So, it’s early to say. But we are confident of our reserves -- we have reserves to cover 11 months’ merchandise imports. So, we are confident of meeting whatever needs are there from the external sector.

 

What is the aspirational growth rate?

 

Malhotra: It is more than 6.5 per cent. We should aspire to higher rates.