Benign inflation outlook opens policy space; Centre working on MSME support package: RBI MPC’s Nagesh Kumar

Nagesh Kumar, RBI MPC external member

With inflationary pressures easing sharply and projections for FY26 revised down to 2.6%, the government is preparing a fresh support package for micro, small and medium enterprises (MSMEs), Nagesh Kumar, external member of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) told Moneycontrol in an interview.

Kumar added that the decline in inflation expectations has created space for both fiscal and monetary policy to extend greater support to growth and employment. “The inflationary expectations remain well-anchored, and the average headline inflation has trended down. The projections for 2025–26 have now been revised downwards to 2.6 percent from 3.7 percent in the June MPC meeting. The GST reforms are also likely to push it down further.”

Further Kumar said that the government is already working out a package aimed at helping MSMEs cope with recent trade shocks and weak external demand. “MSMEs need to be supported through liquidity provision, credit guarantees and moratoriums,” he said, pointing out that many small exporters have been affected by the recent US trade measures, including penal tariffs on Indian goods and tighter H-1B visa rules.

He cautioned that the US accounts for about 33 percent of India’s exports of labour-intensive goods such as textiles, leather, gems and jewellery, and processed food products sectors that are dominated by MSMEs and employ nearly 40% of India’s manufacturing workforce. The imposition of 25%+25% penal tariffs on Indian exports, coupled with other restrictive trade and immigration policies, could impact these sectors more acutely.

However, the softening inflation trajectory has improved the policy environment. “The benign inflation outlook opens up policy space for monetary action. While the transmission of earlier policy steps is still unfolding, there is a case to move from a ‘neutral’ to an ‘accommodative’ stance to signal readiness to support growth and investment,” Kumar said.

He also underscored the importance of diversifying export markets and strengthening domestic demand, saying that recent trade pacts including the India-UK FTA and India-EFTA Economic and Trade Agreement, effective from October 1, 2025 would help reduce India’s overdependence on the US market. “We must also exploit domestic markets for labour-intensive goods and protect them from cheap imports, especially from China,” he said.

According to Kumar, India’s near-term growth remains strong, with first-quarter GDP expanding 7.8%, prompting an upward revision of the full-year forecast to 6.8% from 6.5%. He attributed the momentum to robust consumption, especially in rural areas, and front-loaded government capital expenditure, though private investment has yet to pick up meaningfully.

“The growth and inflation dynamics are evolving favourably,” Kumar said. “This gives policymakers a unique opportunity to strengthen MSMEs, deepen industrial competitiveness, and support sustained high growth while keeping inflation under check.”