Need to guard against risks of currency appreciation: RBI MPC member Kumar

Says expanding the manufacturing sector could also help in containing inflationary pressures by enhancing the supply capacity

Nagesh Kumar, member of the Reserve Bank of India’s (RBI’s) monetary policy committee (MPC), in an email interview with Manojit Saha, said that deceleration of the manufacturing sector was the reason why he voted for a 25 basis points (bps) policy repo rate cut in the December review. Edited excerpts:

 

You had voted for a reduction in the repo rate of 25 bps points during the December policy review. What was the rationale?

 

I believe that the growth slowdown in Q2 of 2024-25 to just 5.4 per cent from 6.7 per cent was serious because it largely reflected a slowdown of the manufacturing sector. The agriculture growth rate actually improved from 2 per cent in Q1 to 3.5 per cent in Q2 and the services sector was still posting a robust growth rate of 7 per cent (even though slight moderation from 7.7 per cent). The deceleration of manufacturing growth from 7 per cent to just 2.2 per cent was rather sharp. A reduction of the cost of capital through a reduced repo rate could help to revive the growth of private investment besides consumer demand. Keeping in mind the deceleration of the manufacturing sector, I made a case for a 25-bps cut in the repo rate besides a 50-bps cut in CRR, to help enhance liquidity. Expanding the manufacturing sector could also help in containing inflationary pressures by enhancing the supply capacity.

 

Do you think the recent high inflation print could make a rate cut decision complex?

 

The inflation hitting a high rate of 6.2 per cent is also a challenge. However, bulk of the inflation is accounted for by food, especially vegetables, namely tomatoes, onions, and potatoes (TOP). Excluding food, the CPI headline comes down to just 3.1 per cent in October. Keeping in mind the easing of vegetables and edible oil in November, food inflation should be easing further in the coming months. Therefore, I believe that a rate cut would help in reviving economic growth without worsening the inflationary situation, which may soften with seasonal correction in prices.

 

Many central banks have started to reduce interest rates. How do you see this in the Indian context? 

 

The MPC meeting in February will take stock of how the inflation-growth balance was shaping up between now and then against the backdrop of global trends. Most central banks around the world, barring a few, have embarked on a cycle of normalising the monetary policy in recent months.

 

The US Federal Reserve (Fed) has cut the policy rate by 100 bps in three rounds. We do not have to follow what other central banks do. But if we do not follow the process of normalisation when most others have moved forward, we run the risk of currency appreciation. India needs to guard against the risks of currency appreciation in real terms. This is because it would hurt the competitiveness of Indian products.