Saugata Bhattacharya, who is an external member of the Monetary Policy Committee of the Reserve Bank of India and Senior Fellow at the Centre for Policy Research (CPR), believes that trends in various commodities groups suggest optimism on inflationary pressures. In an interview to Business Today, he says that there is space for further repo rate cuts given the inflation forecast and notes that the real repo rate remains restrictive. The RBI has already cut the repo rate twice this year following the February and April MPC meetings. Edited excerpts:
The MPC has cut rates twice this year in February and April and has an accommodative stance. Is there space for further rate cuts, as is being factored by the markets?
At the outset, let me emphasise that I am speaking only for myself and these are my personal opinions. Yes, given forecast inflation, the real repo rate continues to remain restrictive, and the present inflation-growth balance is tilted towards the need to support growth.
What does the ongoing trade war between China and the US mean for the world economy?
There is extreme uncertainty, and with the contours of trade alignment remaining fluid, it is difficult to even remotely predict an equilibrium state. Supply chains are dislocated again and we can only surmise alternative scenarios over the next six months of a changed global economic order, both institutional and bilateral. Overall, in line with the latest IMF and other multilateral forecasts, this is likely to be somewhat adverse for global economic and trade growth.
Domestic growth has been slowing, and the RBI expects the economy to grow by 6.5% this fiscal. Do you think the economy could slow further given the concerns around the US trade policies?
Macro-financial uncertainty remains elevated, including the future rate decisions of global central banks. It is difficult to predict the path of economic activity, but current negotiations between major economic players suggest that the impact on economic growth will be less severe, at least in the short run, than earlier anticipated. Incoming high frequency data also suggest that global activity remains resilient.
India Inc seems to be cautious of investments again. Will a cut in interest rates prod them to invest?
A policy repo rate cut will help small industry (micro and small enterprises) reduce their borrowing costs for working capital as well as fresh investment given their lending rates are repo-linked. In addition, RBI’s significant liquidity infusions will help in transmission to MCLR-linked rates, and my presumption is that overall transmission to Weighted Average Lending Rates will be quicker in this cycle.
There seems to be demand moderation and private consumption is yet to pick up fully. Do you expect a pick-up in private consumption this fiscal?
The fiscal support through tax relief for a significant segment of taxpayers (and households) was a pre-emptive demand augmentation measure. The government has been very responsive both to emerging economic trends as well, in my understanding, to industry feedback, and needs to be complimented on this. This is a whole-of-government effort, including monetary policy. Given this, I remain optimistic on a pick-up in private sector investment, particularly as the global trade uncertainty settles down.
With crude prices seen to trend low and prospects of a normal monsoon, are inflationary pressures a thing of the past for now?
As of now, price trends in various commodities groups suggest optimism on inflation. Even if a hot summer increases vegetables prices over the next couple of months, there is room for headline inflation to remain durably close to 4%. Monsoon forecasts, broader El Niño trends, and other meteorological signals indicate optimism on conducive weather conditions. Rabi procurement has been good and cereal stocks remain comfortable.
While the reciprocal tariffs by the US are on a 90-day pause for now, how can India make the best of this situation?
It is difficult to predict given the current fluid situation, with multiple reconfigurations in US tariff proposals. It will take time for the situation to stabilise. The US-China agreement is encouraging from a global perspective, but whether they might be net negative for Indian exports is not clear. I am waiting for the outline of the early harvest contours of the US-India bilateral trade agreement, as well as the India-European Union negotiations.
Along with the proposed BTA with the US and negotiations for foreign trade agreements with several countries, what measures should India take to grow its foreign trade and exports?
The Government of India has proactively initiated a calibrated review of various trade measures, including a general reduction of tariffs and duties, as well as tailored to the specific contours of the bilateral trade blocs . I remain very optimistic on the outcomes of these deals, with our seasoned trade negotiators balancing various dimensions of trade, investment, intellectual property, non-tariff barriers, labour mobility, etc. Domestic policy measures will also help to augment India’s export competitiveness.
The government is looking at deregulation to ease the compliance burden on businesses and attract investments. What reforms would you suggest for this?
The Indian government has long recognised our challenges in terms of competitiveness and has proactively formulated policy measures to offset these. The policies are gradually yielding results.
The government has over the years introduced measures to deregulate various sectors, liberalised foreign direct investment (FDI) policies, simplified the tax code and reduced tax rates. Structural reforms include introduction of rationalised labour codes, continuing removal of obsolete laws and regulations, accelerated alignment of policies in the digital ecosystem with global best practices, and much more.
India’s investment scenario continues to be seen as challenging by several foreign investors and FDI inflows have been on a downward trajectory. What can be done on this front to revive FDI inflows?
Lower net FDI into India is part of the global trend, largely due to flows into the US. This began well before the current US administration and is partially the outcome of the actions of the Biden administration but will likely accelerate going ahead. The real FDI picture is more complex.
At $75.1 billion, gross FDI into India during April-February FY25 was actually higher than the corresponding 11 months of FY24 ($65.2 billion). The lower net FDI flows had been due both to significantly higher repatriation of profits as well as outbound FDI from India (which increased by $8 billion and $11 billion, respectively, FY25). The former may be explained by profit taking through IPO exits and other disinvestments. The latter needs better clarity on the underlying causes; a part of it is likely to have been for mergers and acquisitions by Indian companies looking for markets access, technology or raw materials.
@surabhi_prasad
