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Indian Express
7 hours ago
- Business
- Indian Express
Developments since June 6 decision show why we need to be cautious: MPC's Nagesh Kumar
The Reserve Bank of India's (RBI) decision earlier this month to tighten its stance to 'netrual' from 'accommodative' even as it cut the policy repo rate by a larger-than-expected 50 basis points (bps) to 5.50 per cent caught markets off-guard. However, according to Nagesh Kumar, one of the three external members on the central bank's Monetary Policy Committee (MPC), developments since the June 6 rate cut show why policymakers need to be cautious. 'Although the inflation numbers up to May are looking very good, with oil prices shooting up due to the Israel-Iran conflict, you never know what is in store. So, a neutral stance allows you freedom to adjust your actions. Since the MPC's decision on June 6, a lot has changed. We live in a very dynamic world, and that is why we need to be cautious,' Kumar said. Global crude oil prices rose to around $75 per barrel after Israel attacked Iran on June 13. Investors are now anticipating another sharp increase in oil prices after the US said on June 21 it had bombed three Iranian nuclear facilities. Speculation is rife if Iran – which has called the US attack outrageous and said it reserves all options to defend its sovereignty – will look to retaliate by blocking the Strait of Hormuz, a key waterway which handles almost a quarter of the global oil trade. In an interview with Siddharth Upasani, Kumar – Director and Chief Executive of New Delhi-based think-tank Institute for Studies in Industrial Development – also discussed how a consensus was finally achieved on his calls for a 50 bps rate cut and why growth numbers are not showing a broad-based revival, among other subjects. Edited excerpts: In the last meeting (in April) itself I had started making a case for a 50 bps cut. But at that time, trends were not very clear. There was uncertainty about the inflation number – it had begun to come down, but the drop was not significant enough. However, in June, we had numbers before us like 3.2 per cent in April. It has gone down even further in May. Looking ahead, the outlook seemed to be quite comfortable and benign because of the expectation of a better-than-normal monsoon, the declining prices of crude oil, and the softening of the US dollar. It was in that context and keeping in mind the continued concern about tariff-related uncertainties –the external economic environment had become very uncertain and volatile, with International Monetary Funds and Organisation for Economic Co-operation and Development downgrading the outlook very significantly, and World Trade Organization (WTO) projecting -1.5 per cent growth in world trade – and the need to support growth and the continued concerns about urban consumption and private investment not picking up that we cut the repo rate by 50 bps. In my view – and I articulated this in the April meeting – compared to two cuts of 25 bps each, one larger cut of 50 bps would be more effective. My reason was very common-sensical: if it is a quarter percentage point reduction, the banker might absorb a part of it as it is such a small change. But if it is 50 bps, the banker will have to pass it on with lower lending and deposit rates. We have seen the transmission of the 25 bps cuts being a bit slow. Of course, there will be a lag. But the stickiness of the deposit and lending rates was there. But 50 bps would be large enough to push the banks to take it into account. And if we feel confident that we will need another cut of 25 bps two months down the line, why not frontload it? That's why I made a case for a 50 bps cut. And this time, compared to April, the reason and policy space were much more solid. Seeing that, the consensus between us was easier to achieve. Well, at that time, inflation was high. And inflation targeting requires action when inflation is high. Even till October 2024, when the MPC was reconstituted, inflation was quite high around 6 per cent. The RBI's action also needs to be seen in the context of growth. We ended 2023-24 with a very robust 9.2 per cent growth. Growth was much less of a worry at that time. Yes, 7.4 per cent was a pleasant surprise and showed some kind of revival. However, it was not a broad-based revival; it was driven by rural consumption and government capex towards the end of the financial year. Because it was not broad-based and the external environment is becoming more challenging and uncertain – Liberation Day was in April – this is the time when you need to build policy actions which will protect the growth sentiment and build momentum. The change in the stance to neutral caught everyone off-guard, with the MPC saying there is very limited space to support growth going forward. Should we rule out rate cuts now? The way inflation outlook is shaping will determine the future course of action. The RBI Governor, in a recent interview, has clarified that. It depends upon what kind of inflation you have because you need to have a certain real rate of interest. If that becomes negative, then savings will not be incentivised. Assuming that 1.5 per cent is the real rate of interest you want to preserve, then the floor (for repo rate) with inflation rate would be 5.5 per cent. However, if inflation goes to 3 per cent, then you have additional room to manoeuvre. Therefore, it really depends on the dynamics of the inflation and growth numbers. I wouldn't say that. Strictly speaking, the stance is not within the purview of the MPC. But we, of course, make some observations. I think it was purely the fact that with the 50 bps rate cut, the room (to cut further) going forward is limited. In view of that, it was a step to manage expectations. The uncertainty surrounding us is another factor to keep the stance neutral, which gives you more freedom to go either way. Although the inflation numbers up to May are looking very good, with oil prices shooting up due to the Israel-Iran conflict, you never know what is in store. So, a neutral stance allows you freedom to adjust your actions. Since the MPC's decision on June 6, a lot has changed. We live in a very dynamic world, and that is why we need to be cautious. When circumstances are uncertain and you want to promote growth, you try to reduce the cost of capital to make it easier for the entrepreneur who is sitting on the fence on whether to invest or not. That is what it does at the margin. Ultimately, investment decisions are a very complex process. But the cost of capital is one of the factors which is weighed by the entrepreneur, and policymakers try to assist the process. By lowering the cost of capital and trying to push demand, you are creating more favourable conditions for an investment decision than before. As I said, making an investment decision is a very complex process and cost of capital is only one of the factors. You can only exercise the levers which are within your control. You can't really do much about global uncertainty. What Mr Trump does on a day-to-day basis is something you have no control over. But holding other things constant, these (such as lowering the cost of capital) are some of the things which we can do something about. The other could be a fiscal stimulus which may be helpful to revive demand. The government has budgeted for a very substantial capex. So, frontloading the capex to keep the momentum up while things settle down in the international market could be another thing that could be done. Well, they are reacting to the changed times. We are now in a situation where the multilateral framework for trade has been completely put aside. MFN (Most Favoured Nation) – which has been the bedrock of multilateralism – has also been thrown out the window because Mr. Trump has X rate for China, Y rate for India, Z rate for Europe. The dispute settlement mechanism of WTO has been abandoned for some time because the Appellate Body was not renewed. In normal times, you don't have that urgency and you negotiate in a very relaxed manner. But when you need to, you find ways to expedite the process. That is what is happening. There is a realisation that we need to seize the moment and close these deals quickly before the damage is done, to protect and preserve our economic interests in the best possible manner. Sooner we do that, the better it is. Then the uncertainty that is prevailing is cleared. Yes, some of these are the early harvest type of arrangements, and they will continue to be negotiated. But normally in trade negotiations, you know what you can do for a large part of the agenda and only a small part, maybe 10-20 per cent, holds up progress. So, the best way forward is to move ahead with the part of the agenda on which you have no issues and find ways to address the red lines. Siddharth Upasani is a Deputy Associate Editor with The Indian Express. He reports primarily on data and the economy, looking for trends and changes in the former which paint a picture of the latter. Before The Indian Express, he worked at Moneycontrol and financial newswire Informist (previously called Cogencis). Outside of work, sports, fantasy football, and graphic novels keep him busy. ... Read More
Indian Express
25-04-2025
- Business
- Indian Express
Opinion To avoid reciprocal tariffs, lock down trade deal with the US
The economic consequences stemming from the uncertainty unleashed by US President Donald Trump's tariff policies are becoming visible. Countries across the world are being affected. On Tuesday, the International Monetary Fund lowered its forecast for global growth and trade this year. Alongside, the Fund cut India's growth estimate by 30 basis points to 6.2 per cent. A day later, the World Bank also lowered the country's growth projection, pegging growth at 6.3 per cent this year, down from its earlier assessment of 6.7 per cent. Some expect an even greater hit to growth. The RBI, however, is less pessimistic. It has scaled down its estimate of economic growth by just 20 basis points, pegging growth at 6.5 per cent. The impact to the economy is likely to be felt in many ways. Exports of goods will be hit. Indian IT firms that derive a substantial share of their revenues from the US are also likely to witness a challenging environment as American companies scale back, possibly delaying existing projects and fresh deals. Some export hubs like Tiruppur, though, may benefit. The uncertainty is also likely to constrain fresh investments in the economy, especially as countries seek to redirect their exports. Alongside, the volatility in the financial markets may also make overseas fundraising difficult, even as commodity prices may remain subdued. Brent crude oil is currently hovering around $67 per barrel. Lower oil prices will be a positive for government finances. In its last meeting, the RBI's monetary policy committee had cut the repo rate by 25 basis points in order to stimulate the economy. But, at this juncture, there is a case for deeper rate cuts. In fact, MPC member Nagesh Kumar has noted that 'one could be more ambitious and target a 50 basis point cut, which in my view may be more effective than two cuts of 25 basis points each'. However, as per the World Bank, 'the benefits to private investment from monetary easing and regulatory streamlining are expected to be offset by global economic weakness and policy uncertainty'. Greater clarity over the latter will emerge in the weeks and months ahead as countries try to stitch trade deals with the US. Scott Bessent, the US Treasury Secretary, has reportedly indicated the possibility of India being the first country to finalise a trade agreement. Successful closure of the deal would help the country avoid reciprocal tariffs and reduce uncertainty, providing clarity to both global and domestic firms.
Economic Times
23-04-2025
- Business
- Economic Times
India's growth prospects to be impacted adversely over risk of prolongedrecession due to trade wars: RBI
(You can now subscribe to our (You can now subscribe to our Economic Times WhatsApp channel The Reserve Bank of India's Dr Nagesh Kumar in the minutes for Monitory Policy Committee Meeting from April 7 to 9 flagged serious concerns over the ongoing trade wars, saying India's growth prospects will be affected adversely."There is a serious risk of the world economy getting into a prolonged recession because of the trade wars and protectionism, which would also affect India's growth prospects adversely. The WTO has already warned about the negative outlook for world trade. The global GDP growth projections for the current year are likely to be revised downwards in the aftermath of the reciprocal tariff and the trade war," said Dr Nagesh Kumar in the MPC minutes released on Wednesday.
Time of India
23-04-2025
- Business
- Time of India
India's growth prospects to be impacted adversely over risk of prolongedrecession due to trade wars: RBI
The Reserve Bank of India's Dr Nagesh Kumar in the minutes for Monitory Policy Committee Meeting from April 7 to 9 flagged serious concerns over the ongoing trade wars, saying India's growth prospects will be affected adversely. by Taboola by Taboola Sponsored Links Sponsored Links Promoted Links Promoted Links You May Like You Won't Believe What These Celebrities Studied in College Learn More Undo "There is a serious risk of the world economy getting into a prolonged recession because of the trade wars and protectionism, which would also affect India's growth prospects adversely. The WTO has already warned about the negative outlook for world trade. The global GDP growth projections for the current year are likely to be revised downwards in the aftermath of the reciprocal tariff and the trade war," said Dr Nagesh Kumar in the MPC minutes released on Wednesday.
Reuters
03-03-2025
- Business
- Reuters
India's factory activity growth dips to 14-month low in Feb due to cooling demand
BENGALURU, March 3 (Reuters) - India's manufacturing activity grew at its weakest pace in over a year last month due to cooling demand, but employment generation rose at a healthy pace and inflation eased, a private survey showed on Monday. The softer manufacturing data suggests the growth rebound in Asia's third-largest economy may be short-lived after the government said gross domestic product expanded 6.2% last quarter from 5.6% in the previous one. Goods production, which accounts for less than a fifth of overall output grew 3.5% in October-December, only a slight rise from 2.2% in the previous quarter. The HSBC final India Manufacturing Purchasing Managers' Index (INPMI=ECI), opens new tab, compiled by S&P Global, fell to 56.3 in February - its lowest since December 2023 - from 57.7 in January. A preliminary estimate was much higher at 57.1. However, the index has been in expansionary territory - above 50 - for 44 consecutive months, the longest streak since July 2013, which marked 52 months of continuous growth. Domestic demand waned slightly with the new orders and output sub-indexes falling to 14-month lows although factories reported an improvement in technology investment and commissioning new projects. International demand softened last month from an over 14-year high in January. "Although output growth slowed to the weakest level since December 2023, overall momentum in India's manufacturing sector remained broadly positive in February," said Pranjul Bhandari, chief India economist at HSBC. "Robust global demand continued to boost growth in the Indian manufacturing sector, which increased its purchasing activity and employment." Manufacturers expanded their workforce, extending employment growth to a year albeit at a slightly slower pace than in January when they added a record number of jobs in the survey's 20-year history. Input costs rose at the slowest in 12 months and the pace of increase in prices charged eased to a five-month low, suggesting some of the charges were passed on to clients. Buoyant demand and greater labour costs underpinned the hike in fees, HSBC said. Retail inflation slowed to a five-month low in January, supporting expectations of another rate cut from the Reserve Bank of India (RBI) after it eased policy last month to boost an economy expected to grow at its slowest pace in four years this fiscal year. RBI Monetary Policy Committee member Nagesh Kumar told Reuters late last month the weakness in manufacturing, which is important for job creation, was a major factor along with moderating inflation in the decision to cut interest rates. Despite a slower expansion in goods production, the business outlook for the coming year was little-changed from January and remained optimistic underpinned by favourable demand trends, healthy customer numbers and marketing efforts, the survey showed.
