Neutral monetary policy stance retains an option for both pausing and cutting rates: RBI MPC Member Saugata Bhattacharya

Indian Express

2 days ago

Saugata Bhattacharya, a Member of the Reserve Bank of India's Monetary Policy Committee (MPC), says that geopolitical tensions are unlikely to pose a 'significant risk' to the RBI's growth-inflation forecasts, based on the current data and global environment. Several positive factors supporting India's economic momentum, including a favourable monsoon, strengthening rural demand, the possibility of monetary policy easing, and timely government initiatives — all of which bode well for a revival in growth, he says.
In an interview with Hitesh Vyas and George Mathew, Bhattacharya — the lone MPC Member who voted for a more modest 25 basis points (bps) cut in the repo rate during the June policy review, as opposed to the 50-bps reduction backed by other members — emphasises that the committee's 'neutral' stance leaves room for both a pause and further rate cuts, depending on future developments. Bhattacharya currently serves as a Senior Fellow at the Centre for Policy Research.
Was it too early to change the monetary policy stance to neutral in the last policy?
At the outset, let me reiterate that I speak only for myself and these are my personal opinions.
Although I had some prior reservations on changing the stance from neutral to accommodative at the April '25 meeting, I had gone with the majority view on the shift. This was based on the clarification that the shift to accommodative signalled only that 'a rate hike [was] off the table' and remained consistent with a pause, with the more probable future action, despite the then extreme uncertainty, being a cut, given the space opening up for policy easing with falling CPI inflation.
The shift now back to neutral is simply a mild forward guidance that, post the steep 100 bps (and now front loaded) repo rate cuts over the space of 4 months together with the large surplus system liquidity, this was a time to pause, monitor the incoming data on a 'meeting-by-meeting' basis, assess the effects on macro-financial data and proceed with further calibrated easing should economic conditions so warrant. The collective point was to emphasise that there would be no further pre-committed policy easing in this cycle.
Do you see the probability of more rate cuts in the near future in the wake of benign retail inflation?
A neutral stance still retains an option for both pausing as well as cutting rates. Given the present, evolving and likely continued elevated levels of uncertainty, rate actions will have to be based on incoming data and an assessment of the associated macro-financial environment. It is very difficult to provide guidance at this point.
This change of stance, once again, in no way precludes the possibility of further easing if actual inflation undershoots forecasts and opens up further space for policy easing. RBI Governor has already articulated this succinctly.
With recurring geopolitical tensions that pose a risk to inflation, do you expect domestic inflation to remain in the RBI's comfort zone for the entire FY26?
I don't think, given our present information set, various geopolitical tensions are likely to be a significant risk to RBI's forecasts of the growth-inflation balance. To my mind, more worrying is the evolving series of bilateral trade deals with multiple countries, which will define the relative export competitiveness of India. More importantly, the eventual outcomes will define an eventual equilibrium of supply chains, investments, trade flows, which will have a more profound effect on India growth prospects.
Given the challenging global environment, especially tariff issues, do you think we will be able to meet the real growth rate of 6.5 per cent in FY26?
Due to the continuing elevated uncertainty regarding global trade, the continuing spillovers into financial markets volatility and the prospects, extending well into the medium term, of adverse economic shocks on growth, economic forecasts at this point, to my mind, are only indicative in nature, conveying merely a sense of the direction of travel. As of now, most high frequency indicators suggest continued resilience in economic activity. Prospects of a good monsoon and improving rural demand, combined with the monetary policy easing and various well-timed Government initiatives, augur well for growth revival.
What key triggers are required for India to achieve its aspirational growth target of 7-8 per cent?
As RBI Governor has stated, monetary policy is a necessary but not sufficient condition for stimulating growth. MP is a component of a coordinated policy response. The thoughtful personal income tax rate cuts in the Budget, higher targeted budget capital outlays, trade deals and negotiations, manufacturing incentives, regulatory and compliance rationalisation, all have to interlock.
When do you expect the consumption-boosting measures announced in Budget 2025–26, along with the 100-basis-point repo rate cut, to begin translating into tangible increases in aggregate demand?
The effects of the coordinated stimulus measures are likely to begin to see traction sooner rather than later.
Transmission of the repo rate cuts plus the abundant liquidity infused by RBI will help accelerate transmission more quickly than in the past. The dip in personal income tax collections in Q1 FY26 suggests that tax paying households are already seeing an increase in their disposable incomes. This too will accelerate over the next quarters. Other price and income support measures will also help boost demand.
The transmission of monetary policy in India has often been delayed or uneven. What structural reforms do you think are necessary for better pass-through, and can policy be truly effective without them?
Transmission of repo rate cuts and surplus liquidity in FY26 is likely to have been faster than in previous easing cycles. RBI data shows that the weighted average lending rate (WALR) on fresh rupee loans and outstanding rupee loans declined by 6 bps and 17 bps, respectively, during February-April 2025. This fall is likely to have accelerated during May and June, especially post the 50-bps repo rate cut, led by EBLR priced loans.
With global central banks increasingly using forward guidance as a policy tool, why has the MPC been relatively cautious in providing explicit forward guidance?
I disagree that in the current round of policy easing, global central banks have provided definitive forward guidance.
Their statements are replete with phrases like 'meeting by meeting', 'without a pre-committed easing path', 'monitoring incoming data', 'assessing the current inflation situation', 'policy in a comfortable space', and similar cautious qualifiers on future policy actions. On the contrary, my own assessment is that since the start of the current rate easing cycle, our own MPC statements have been more confident on larger space opening up for rate cuts, given moderate inflation prints.
Do you see signs of a pick-up in private capex? Which sectors are currently witnessing increased investment activities?
As of H1 FY25, private capex was increasing, but remained concentrated in a few sectors. I remain confident that this is now becoming more broad-based, particularly in expansion of existing projects. The reduction of borrowing costs, and consequently increase in retained profits and cash flows, will hopefully also revive supply chain integrations for small and medium enterprises as large projects are implemented.
There is clear evidence that Indians are increasingly shifting from traditional savings to investment-oriented financial instruments. What's your view on this trend?
Depositors and investors are likely to assess the best expected returns on their savings, both in the near- and medium terms. They might be incorrect in their assumptions, but the shift towards markets over the past few years reflect the expected comparative higher returns. The more sophisticated investors also factor in post-tax returns in their investment decisions. I believe that the strong shift away from savings bank deposits might begin to moderate, yet the likely bank deposit rate cuts might moderate this shift back.