MC EXCLUSIVE GST reforms may cool inflation but RBI unlikely to rush into rate cuts, says MPC member Saugata Bhattacharya

Saugata Bhattacharya

The government's GST reform push is expected to ease inflationary pressures and spur consumption but the Reserve Bank of India is unlikely to rush into a rate-cutting cycle, Saugata Bhattacharya, an external member of the central bank’s monetary policy committee, has said.

The central bank will take a cautious, data-driven approach, waiting to assess the full spectrum of primary, secondary, and tertiary effects of the tax overhaul before altering the policy stance, Bhattacharya told Moneycontrol in an interview. Edited excerpts:

Do you think CPI inflation remaining below the 2 percent mark will be a concern for the RBI?

Monetary policy responses will be shaped by expected persistence or transience of prices, especially considered in conjunction with forecast growth. RBI forecasts indicate that CPI inflation below 2 percent will be short lived and is projected to rise above the target in Q4. We have to await multiple policy and economic decisions likely to affect both inflation and aggregate demand before a response.

You said if these tariffs persist, there is likely to be an adverse impact on India growth in FY26. Will this make a case for downward revision of GDP projections?

If India-specific tariffs continue at the indicated levels of 50 percent, without considering the effects of counterbalancing policy actions, an adverse impact on near-term growth is very likely. How much will depend on the primary, secondary and tertiary effects on broader economic activity.

Do you think the measures the government's planned GST overhaul increase its fiscal burden? What will the RBI do?

It is widely expected that the proposed GST rate slab changes and items transition will reduce GST tax collections, thereby adversely affecting the fiscal deficit. The proximate relation of this with monetary policy is an increase in government bond yields. Over a longer period, the increase in household and enterprise disposable incomes and hence a potential boost for demand, production, investment and growth are likely to have progressive effects on inflation.

With GST reforms likely to lower inflation and boost consumption, will the RBI cut rates further?

This is just like the trade-tariff issue. Till a final recalibration of GST rates and baskets is finalised, it is difficult to take a rate view till the full implications of primary, secondary and tertiary effects are understood.

The proposed changes should initially result in a fall in prices of most goods and services. However, with the higher disposable incomes likely to incentivise consumption demand, the second-round effect of output, investment and growth on the prices of at least some goods and services are difficult to predict.

Since monetary policy decisions have to take a longer-term perspective, as you note in your question, the effects on inflation and consumption are somewhat contrary, but are likely to play out across different time scales.

Will the RBI in October policy have enough data on growth, inflation and monsoon playout to make decision on interest rate?

In the present uncertain economic environment, decisions have to be taken on a meeting-by-meeting basis, using incoming data and forecasts and outlook of economic activity. There will be additional data points available before the next MPC meeting, which will help to take a decision. However, the major issue clouding the outlook is the uncertainty regarding our external balance and its direct and indirect effects on domestic economic activity.

How will the rating upgrade by the S&P Global help inflows of foreign investors in the country? Will this have any impact on the rupee?

The sovereign ratings upgrade has helped, and will continue, to offset some of the negative sentiment created by the penal tariffs on India. However, there is still significant uncertainty regarding trade and thereby private sector investment. In addition, the pool of global savings (capital) is likely to have shrunk. In addition to the effects of trade and capital accounts flows, there will be the effects of relative easing of global central banks on the US dollar.