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Informist, Monday, Dec. 29, 2025

 

--MPC Bhattacharya: Present monetary policy appropriate

--MPC Bhattacharya: Difficult to give guidance on rates amid uncertainty

--CONTEXT: MPC external member Saugata Bhattacharya's comments in interview

--MPC Bhattacharya: Need to monitor growth-CPI balance before further action

--MPC Bhattacharya: Capacity utilisation in mfg at 74-75% vs 80% in the past

--MPC Bhattacharya: Imports suggest external supply adding to overcapacity

--MPC Bhattacharya: External supply, global uncertainty hindering pvt invest

 

By Shubham Rana

 

NEW DELHI – Monetary policy in India is appropriate right now, with both growth and inflation projected to gradually move to "normal levels" over the next few quarters, according to Saugata Bhattacharya, external member of the Reserve Bank of India's Monetary Policy Committee.

 

The persisting uncertainty, however, makes it difficult to provide forward guidance on the policy rate path right now, Bhattacharya told Informist in an e-mail interview. "The decision at each meeting will be based on the available data, evaluating the emerging risks, and (we will) proceed meeting by meeting," he said, adding that the views expressed were his alone and he did not speak for the other members of the MPC.

 

On Dec. 5, the MPC unanimously voted to lower the policy repo rate by 25 basis points to 5.25%. It has lowered the repo rate by 125 bps in 2025 to support growth, while inflation fell. The committee also retained the 'neutral' policy stance, but external member Ram Singh was of the view that the stance should be changed to 'accommodative'. 

 

Bhattacharya said the difference in the pace of convergence of growth and inflation to their respective targets was one of the main factors behind his decision to vote for a rate cut this month. While the RBI's medium-term inflation target is 4%, it does not have a formal target for growth. RBI Governor Sanjay Malhotra had earlier said that 8% was the aspirational rate of growth in India.

 

The Indian economy grew at the 'aspirational' rate in the first half of 2025-26 (Apr-Mar) at 8%, with GDP growth in the September quarter exceeding expectations at 8.2%. The central bank projects economic activity to slow down in the second half of FY26, with full-year growth projected at 7.3%.

 

Retail inflation, on the other hand, is expected to rise going ahead after falling to a record low of 0.25% in October. It rose to 0.71% in November and the RBI projects it to average 2.0% in FY26 and rise to 3.9-4.0% in the first half of FY27.  

 

"Transmission of monetary policy via the interest and credit channels into a growth stimulus (and hence price reflation) takes a relatively long time," said Bhattacharya, a senior fellow at the Centre for Policy Research. "Hence, we need to monitor the evolving growth-inflation balance before further action."

 

Below are edited excerpts from the interview:

 

Q. The MPC minutes showed that you said "a priority now is to overweight growth in the balance of multiple objectives", and "policy interest rate is now consistent with macroeconomic stability." Does this mean you see no further policy space to support growth, assuming both inflation and growth prints come in line with projections?

A. Let me begin with the disclaimer that I speak for myself, not the MPC.

 

Given the persisting uncertainty, it is difficult to provide forward guidance on the policy rate path. The decision at each meeting will be based on the available data, evaluating the emerging risks, and (we will) proceed meeting by meeting. Consistency with "macroeconomic stability" is a formal way of saying that multiple economic indicators are forecast to gradually move to normal levels over the next few quarters and, hence, the present monetary policy is appropriate.

 

Q. Since the expected time for inflation to converge to its target might be longer than for growth, shouldn't the MPC look to lower rates further to try and push headline inflation back to the 4% mark quicker?

A. The differential speed of convergence of growth and inflation to their respective targets was one of the main factors underlying my decision to act on the policy space opened up by low inflation. Transmission of monetary policy via the interest and credit channels into a growth stimulus (and hence price reflation) takes a relatively long time. Hence, we need to monitor the evolving growth–inflation balance before further action.

 

Q. Will you consider the impact of the new CPI and GDP series on forecasts at the February meeting, since the new series will be released after the MPC's meeting in February?

A. We do not know how significantly the forthcoming new CPI and GDP series (and the associated back-casted series) might change the growth–inflation dynamics, which is currently the basis for my decisions. But any MPC decision is basis current information set and data. The implications of the new series will be considered in subsequent meetings.

 

Q. You said that bank credit offtake might be reflective of a moderate revival in private investment. What is holding a sharp rise in broad-based private investment?

A. Capacity utilisation levels in manufacturing for many quarters are at 74-75% which, in my experience, seem to be lower than the levels in the past (at around 80%) which have given pricing power to producers. In addition, merchandise imports suggest that external supply is also adding to this "overcapacity". These, in addition to the present uncertainty in the external environment, are some of the factors which seem to be hindering a broad-basing of private investment.

 

Q. GDP growth was unexpectedly high in Apr-Sept because of low inflation. The December quarter is also likely to see very low CPI and WPI inflation, and push up Oct-Dec GDP growth higher than the RBI's 7% forecast. Do you think during such times, when statistical factors are affecting growth prints, it is more prudent for the MPC to look at other data as the primary indicator of economic activity?

A. MPC decisions are based on a wide range of data, industry inputs and (the publicly available) RBI Surveys, which provide a range of signals on growth and prices. The difficulty is in prioritising the signals, which sometimes provide competing, if not contradictory, interpretations, assess the objectives which require a larger weight in the current and projected evolution of macroeconomic risks. Rate decisions are then based on the assessed priorities and risks.

 

Q. How much of an impact have you seen of the goods and services tax rate cuts on inflation and growth so far?

A. It is difficult to provide an estimate of the impact of GST on macroeconomic variables, since it is difficult to isolate the specific impact, adjusting for the effects of adjustments like input tax credit, etc. To my mind, it is also a bit early for the effects to stabilise, with only a couple of months post the implementation of the cuts. It is possible to mechanically compute at least a partial impact, but I leave it to your readers to do this exercise.

 

Q. The RBI has announced another INR 3 trillion of liquidity injection for this month and January. Do you think this amount of liquidity will be enough for full transmission of rate cuts or how much more liquidity is required?

A. RBI has been very nimble, proactive and forward-looking in managing system liquidity. It has maintained an ample supply of both short-term and durable liquidity to keep short-term money market rates close to the policy rate, denoting a balance in the supply of loanable funds. Transmission in this easing cycle has also been faster than in the past. RBI Governor Sanjay Malhotra has also consistently emphasised that the RBI will provide ample liquidity to support various macro-financial objectives.  End

 

Edited by Avishek Dutta

 

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