 "Growth needs to be supported by cheaper credit: MPC external member Nagesh")
Nagesh Kumar, one of the three newly appointed external members of the Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC), said on Wednesday that interest rates should be reduced to make loans cheaper to support growth, which has been sluggish.
Kumar was the only member who voted for a rate cut (of 25 bps) during the monetary policy review meeting earlier this month. All other members voted for keeping the policy repo rate unchanged at 6.5 per cent.
“I voted for a 25 basis point cut in the repo rate and the adoption of a neutral stance, as I felt that inflationary expectations have been successfully anchored, while economic growth needed to be supported through cheaper credit,” Kumar told Business Standard.
He said that the monetary policy has had success in managing inflation and anchoring inflationary expectations well, which was evident from the fact that CPI headline has been around 4.5 per cent, and was slightly lower at 3.6 per cent in July-August, 2024.
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Kumar commented that inflation, excluding vegetables, is even lower at 3.2 per cent (July-August) and that food inflation, especially cereals and vegetables, has been challenging but it is driven by cyclical supply side issues rather than demand, which is addressed by monetary policy.
He also said that household inflationary expectations have declined by 10 bps. “A lower proportion of households expect prices and inflation to increase over 3 or 12 months ahead,” Kumar said.
The external member said the Indian economy shows signs of a slowdown of growth rate, from 8.2 per cent in FY24 to 6.7 per cent in Q1FY25, while pointing out a lower growth forecast for the current financial year as compared to the previous one.
“The (RBI) projection for 2024-25 is around 7.2 per cent, which is still among the highest in the world but lower than the 2023-24 growth rate,” he said, adding that the Survey of Professional Forecasters has revised it down by 10 bps.
Making a strong case for reduction in interest rates, Kumar said core sectors such as cement, iron & steel, and chemicals have shown negative growth over the past two quarters despite a rather heavy infrastructure push by the government.
“Various surveys suggest that the demand conditions in manufacturing and the job landscape moderated across major sectors. Overall business sentiment has moderated in Q2FY25. PMI for manufacturing eased somewhat in September, although it stayed in the expansionary zone,” he said.
Kumar cited India’s merchandise exports, which shrank by 9.3 per cent in August due to subdued demand abroad, and said that the April-August growth of merchandise exports has been “just a marginal 1.1 per cent only”.
He said Indian industry seems to be suffering from demand deficits in both domestic and external markets. According to Kumar, it is the demand deficits that explain why private investment is not picking up momentum. “This is despite the healthy balance sheets of the corporate sector, and all the reforms and incentives extended by the government,” Kumar said.
He emphasised on the need for private investment 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,” he said.
Kumar also highlighted that several industrialised and emerging economies have started to cut interest rates to revive economic growth.
In the US, the Fed has cut the policy rate by 50 bps. The EU, Switzerland, Mexico, China, and South Africa have begun to normalize monetary policy by cutting rates, he said.
On the question if India has been able to capture the opportunity presented by China+1, he said the country’s success in attracting Apple and its vendors like Foxconn to assemble iPhones here is a part of the China+1 restructuring of global supply chains.
“This trend of restructuring of supply chains by global companies could be an opportunity for India to attract investments to build our productive capacities if we can get our act together in terms of investment climate, efficient logistics, stable macroeconomic environment, cost of capital, and overall cost of doing business vis-a-vis peer countries,” he added.