MC Interview| Inflation scenario, US trade-talk outcome to decide RBI policy, says MPC member Nagesh Kumar

Kumar stressed that while the RBI has already cut the repo rate by 100 basis points (Bps) since February to aid growth, but now the central bank is likely to take pause and assess the impact of its rate actions before making further moves.

Nagesh Kumar, an external member of the Reserve Bank of India’s (RBI's) Monetary Policy Committee (MPC), told Moneycontrol in an interview that the future interest rate decisions by the central bank will be decided on how inflation trends evolve and how trade policy uncertainties are resolved with the United States.

Kumar stressed that while the RBI has already cut the repo rate by 100 basis points (bps) since February to aid growth, but now the central bank is now likely to take a pause and assess the impact of its rate actions before making further moves.

“The case for stimulating private investments and urban demand remains, and the benign inflation outlook provides policy space. One has to wait and watch as the transmission of the existing actions takes place and how the trade policy uncertainties play out before considering future policy actions,” Kumar said in an interview.

Private investment, Kumar said, has taken a hit after the announcement of tariffs of 25 percent on Indian exports, along with an additional 25 percent penal tariffs on India’s purchase of Russian crude oil.

“These tariffs have created a sense of uncertainty among investors. Negotiations for a bilateral trade agreement are underway but currently paused. Until clarity emerges on what tariffs will finally apply, businesses and investors are likely to remain cautious,” he noted.

As the Indian economy is primarily driven by domestic consumption and investment and less by exports, it is not so much about the effect on the growth rate, but more about the potential job losses and effect on MSMEs. This is because the US is a major market for India’s exports of labour-intensive goods such as textiles and garments, leather goods, gems and jewellery, shrimp, among other food products, all dominated by MSMEs, Kumar added.

Further, to mitigate the external shocks from tariffs, Kumar emphasised the need for India to diversify its export markets and deepen trade ties with other economies. He called for expedited negotiations on the India-EU Free Trade Agreement (FTA) and a review of existing pacts with Japan and South Korea to make them more effective for labour-intensive sectors.

"India also needs to fully harness the potential of other FTAs such as those with Australia, the UAE and the UK. Tapping the domestic market fully for the finished consumer goods by reducing the dependence on imports would also be helpful,” Kumar said.