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Informist, Thursday, Oct. 24, 2024

 

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--MPC's Kumar: Voted for rate cut as inflation expectations now anchored
--CONTEXT: Remarks by MPC external member Nagesh Kumar in an interview
--MPC's Kumar: India's economic growth needs support through cheaper credit
--MPC's Nagesh Kumar: Indian economy showing signs of a slowdown
--MPC's Kumar: Indian industry seems to be suffering from low demand
--MPC's Kumar:Pvt investment must pick up for Make in India to be successful
--MPC's Kumar: Success of Make in India critical for job creation

 

By Siddharth Upasani

 

NEW DELHI – Lower rates of interest are needed to support growth in the Indian economy, according to Nagesh Kumar, one of the three external members on the Reserve Bank of India's Monetary Policy Committee. Kumar, director and chief executive of the New Delhi-based Institute for Studies in Industrial Development, was the only member of the rate-setting panel to vote for a reduction in interest rates earlier this month.

 

"I voted for a 25-basis-point cut in the repo rate and the adoption of a neutral stance as I felt that the inflationary expectations have been successfully anchored, while economic growth needed to be supported through cheaper credit," Kumar told Informist in an e-mail interview on Wednesday, following the release of minutes of the MPC's Oct. 7-9 meeting.

 

The minutes showed the MPC decided to leave the repo rate unchanged at 6.50% for the 10th meeting in a row, but unanimously voted to loosen its stance to neutral from withdrawal of accommodation as members felt monetary policy was on track to aligning headline retail inflation to the medium-term target of 4%, although a cautious approach was needed so that the gains of disinflation were not squandered.

 

CPI inflation dropped below 4% in July after a gap of nearly five years. Since then, it has rebounded sharply to 5.49% in September due to an unfavourable base effect.

 

According to Kumar, monetary policy has been successful in managing inflation and anchoring inflationary expectations well. And while food inflation, especially for cereals and vegetables, has been a challenge, "it is driven by cyclical supply-side issues rather than demand, which is addressed by monetary policy".

 

At the same time, the rate-setter is of the opinion that the Indian economy is showing "signs of a slowdown", with GDP growth having fallen from 8.2% in 2023-24 (Apr-Mar) to 6.7% in the first quarter of the current financial year. And while the RBI remains fairly confident about the economy's growth prospects, Kumar is less so, commenting that Indian industry "seems to be suffering from demand deficits" in both domestic and external markets. This, according to him, may also be the reason why private investment is not picking up momentum.

 

"Private investment needs to pick up for the success of the Make in India programme and to participate in the ongoing supply chain restructuring on China+1 bases. The success of Make in India is critical for job creation," Kumar told Informist.

 

The RBI, on Oct. 9, retained its GDP growth forecast of 7.2% for FY25, which is at the higher end of expectations. Several economists from within and out of the central bank have warned in recent weeks that growth may come in lower than officially projected. Even the RBI's own staff said in the monthly State of the Economy article released on Monday that GDP growth in Jul-Sept might come in at 6.8%, 20 basis points lower than the central bank's official forecast.

 

In his statement in the minutes, Kumar also argued that the rupee faces the risk of appreciating if Indian monetary policy does not normalise as several industrialised and emerging economies have already done. The drawing of this link is unusual as the RBI tries to distance its monetary policy actions from the exchange rate policy, where its stated stance is to not target any particular level of the rupee and only reduce undue volatility. Kumar did not answer a question seeking further clarity on his comment in the minutes on monetary policy normalisation and the rupee's exchange rate.  End

 

Edited by Avishek Dutta

 

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