MUMBAI: The Reserve Bank of India governor Sanjay Malhotra has voted for the 25 bps repo rate cut ealier this month saying real interest rates needs to be lower given the benign outlooks for both headline and core inflation. At the December 3-5 monetary policy meeting, the panel unanimously voted to lower the policy repo rate by 25 bps, taking the total reduction since this February to 125 bps to 5.25%.
The panel has also revised downwards its inflation projection for FY26 to 2% from 2.6% projected earlier apart from revising upwards the growth forecast by 50 bps to 7.3%.“Considering the benign inflation outlook–-headline as well as core -- real interest rates need to be lower. Therefore, I vote for a 25-bps rate cut.
This will also stimulate demand and be growth-supportive. Moreover, I am in favour of retaining the neutral stance which gives the requisite flexibility to remain data-dependent and act according to the evolving macroeconomic conditions and outlook,” Malhotra said voting for the rate cut.
He further said “demand pressures, as evident from low core inflation, excluding precious metals, are minimal and projected to remain low in the next three quarters,” Malhotra told the panel while voting to cut the repo according to the minutes of the 58th MPC meeting shared by the central bank Friday. The Q3 inflation projection is 0.6% compared to 1.8% earlier, and Q4 projected at 2.9% compared to 4%, and retail inflation for Q1 of the next fiscal is seen at 3.9% compared to 4.5% projected earlier, and RBI Q2FY27 at 4%. Malhotra also noted that receding inflation pressures, although above targets in some advanced economies, open up the scope for more accommodative policies in the ensuing months.
He said; “Although domestic economic activity remains resilient in Q3, weakness in some leading high-frequency indicators is suggestive of a deceleration in the growth momentum in H2 vs H1. Overall, real GDP growth is poised to exceed 7%, much above our expectation of 6.5% at the beginning of the year, as healthy domestic prospects outweigh the concerns on the external front. But next year, growth is projected to be moderate at 6.7-6.8%.“
At the same time, headline inflation in H1 turned out to be much softer than anticipated due to the generalised moderation in price pressures, particularly the sharp decline in food prices. Moreover, core inflation (headline CPI excluding food and fuel) remained rangebound notwithstanding the continued increase in prices of precious metals.Going ahead, good agricultural production, low food prices and exceptionally benign global commodity price outlook suggest that headline inflation for the full year is likely to be around 2%, half of what was projected at the beginning of the year.
External member Saugata Bhattacharya said “based on the assessed costs and benefits of a rate action at this point, the current macroeconomic environment, including inflation and growth forecasts factoring in various exogenous drivers of uncertainty, suggests that the appropriate risk management action is to err in favour of a policy easing.”
Deputy governor Poonam Gupta said inflation dynamics have been more benign than were earlier projected and since the prevailing inflation and its forecast is as low as it is currently, it alone ought to get a larger weight in the monetary policy deliberations and therefore a rate cut is appropriate now.
External member Ram Singh however warned of the impact of rate cut on the already pressured rupee saying “a rate cut can add to the pressure on the rupee. The depreciation is unlikely to cause imported inflation due to low oil and commodity prices.”He added that the real effective exchange rate (REER) of the rupee has already seen a significant decline, primarily driven by foreign portfolio investment outflows amid global financial market uncertainties and relatively less attractive price-earnings ratios for equities.
“Despite these short-term pressures, the macroeconomic fundamentals remain robust,” Singh said, adding “factors such as the balance of payments, forex reserves, fiscal deficit, debt-to-GDP ratio, corporate and banking balance sheets, inflation, and growth dynamics are all healthy. This suggests that the current exchange rate pressures and FPI flows are likely to be self-limiting.”