The trajectory of future rate cuts will depend upon the movement of the Consumer Price Index (CPI) inflation, said Nagesh Kumar, external member of the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC). In an interview to Moneycontrol he said, “The space for further cuts really depends upon what kind of inflation you have, because one needs to have a certain real rate of interest”.
“If inflation stays around 3 per cent, one would have additional room to manoeuvre, assuming a real interest rate of around 1.5 per cent,” he said adding that the real interest rates becoming negative would hurt the propensity to save.
In the last few months, India’s retail inflation stayed below the Reserve Bank of India’s (RBI) medium-term target of 4 percent. India’s retail inflation eased to a 75-month low of 2.82 percent in May, compared with 3.2 percent in April, as food inflation eased below 1 percent for the first time in nearly four years.
Edited Excerpts:
Why was there a need for frontloading of the rate cut in the June policy?
The RBI started to support growth by cutting policy rates since the February 2025 MPC. The repo rate has been cut by 50 basis points in two instalments, besides massive liquidity expansion. The monetary policy stance has also been changed to accommodative in April 2025. However, the transmission of the monetary easing has been slow or moderate as reflected by the sticky deposit and lending rates, and credit growth has been moderate.
In the April MPC, I had argued that a 50 basis points cut at one go may be more effective than two cuts of 25 basis points each. In view of difficult external circumstances requiring support to economic growth, and a favourable inflationary outlook providing headroom for further rate cuts, the case for a 50 basis points cut in the repo rate had become stronger at the June MPC meeting and hence received wide support. A double dose of rate cut has already demonstrated quick transmission and deposit and lending rates have started to fall significantly. Hence, it is likely to spur investment and consumption of durable goods.
What impact do you see of rising crude oil prices due to Iran-Israel tensions on domestic inflation, and will that lead to assessment of projections made by the RBI in the June policy?
The continued global uncertainties on tariffs, protectionism, and trade wars are affecting global trade and growth outlook. The global economic outlook has been described as ‘fluid and fragile.’ The IMF has downgraded the global economic outlook from 3.3 percent to 2.8 percent in 2025. The WTO has projected world trade to contract by 1.5 percent in 2025 in view of trade policy uncertainties.
The April 2025 world trade projection for 2025 is ‘nearly 3 percentage points lower than it would have been without such policy shifts’ and marks a significant reversal from the WTO’s assessment of world trade at the beginning of the year.
The uncertainties surrounding the future of reciprocal tariffs beyond July 9, when the 90-day pause ends, continue to occupy policymakers’ attention, with India, among several countries, engaged in negotiations with the Trump Administration for a bilateral trade deal.
Besides the shrinking global trade, countries like India are also likely to face the onslaught of dumping of cheap Chinese goods in both domestic and overseas markets, which are shunned by the advanced economies, as I had argued in my April MPC statement. Furthermore, the Iran-Israel war that started after the MPC has further clouded the global outlook and has led to a sharp rise in global crude prices. It is not clear when the war in the Middle East and the one in Ukraine will end. One has to wait and watch how long the conflict continues and how global oil prices are affected.
Can change in stance be seen as there is further less scope for rate cuts?
At the time of the June MPC Meeting, the inflationary outlook seemed very benign. Retail inflation in April 2025, which had slowed down to 3.2 percent, is at its lowest level in 69 months. Furthermore, given the softening of commodity prices, especially crude oil to around $ 65 per barrel compared to around $75 per barrel earlier, predictions of a good or above average monsoon, and a soft dollar, all indicated that the inflationary outlook would continue to remain sub-4 percent in 2025-26. Inflationary expectations also remain well anchored as per RBI surveys.
The May 2025 inflation figures were even lower than those in April. However, since the June 4-6 meeting, the Israel-Iran war has affected the outlook for inflation with the rising crude oil prices. One has to wait and watch how the situation plays out. In such circumstances, it is good to have a neutral stance as it provides flexibility to move up or down.
Future rate cuts and their extent would be determined by the growth-inflation dynamics as it evolves in the coming months. The space for further cuts really depends upon what kind of inflation you have, because one needs to have a certain real rate of interest. If the real rate of interest becomes negative, then it would hurt the propensity to save, which is not a good thing. If inflation stays around 3 per cent, one would have additional room to manoeuvre, assuming a real interest rate of around 1.5 per cent.
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