With GDP growth projected at 6.5%, what are the key upside and downside risks the MPC is monitoring?
Post the MPC, after the announcement of the 25% penal tariffs, the risks are clearly tilted to the downside for growth. However, we need to see if and when these tariffs are implemented, how long they continue, and responses from government and other organisations to counter some of the adverse impacts. In addition, the effects of the direct tax cuts and GST rationalisation on consumer demand, the effect of lower borrowing costs on credit offtake and other policy and regulatory interventions needs to be understood better.
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How does the divergence between rural and urban demand recovery influence your policy calibration?
Monetary policy (MP) transmission to the “real” enterprise economy essentially operates through credit channels (largely bank loans). This is skewed to the “urban” (RBI classified as Urban/ Semi Urban). Rural credit is more informal. Hence MP transmission area priorilikely to be more effective till the semi-urban strata.However, rural credit offtake is also increasing, particularly through non-banking channels, which suggests a latent potential rural demand for credit.
What role do supply-side factors—such as monsoon performance and reservoir levels—play in shaping growth optimism?
Even other than MP easing effects, rural demand overall is expected to remain strong prior to the festive season, the normal monsoon, MSP increases and other government actions. Consumer confidence as measured by RBI surveys, if not explicitly, are visibly correlated with monsoons, festive season sales, and other relatively well-understood metrics. Ultimately, demand revival will require multiple coordinated policy and regulatory actions.
How is the MPC navigating food price volatility while anchoring medium-term inflation expectations?
Since 2014, we have witnessed repeated vegetable-led food inflation cycles, with recent years showing heightened volatility. Climate-related disruptions have made food prices more vulnerable to weather shocks, and low vegetable prices risk triggering a “cobweb” effect on cropping decisions. The MPC flagged risks of vegetable price reflation in CPI forecasts and the Governor’s statement, citing base effects and demand-side policy actions. The good news is that RBI’s household survey shows a steady decline in 3-month and 1-year inflation expectations as of January 2025, indicating well-anchored and adaptive inflation sentiment.
What signals are you watching to assess the sustainability of core inflation softness amid headline volatility?
Core inflation has gradually hardened since June ’24, but a significant part of that has mostly been due to rising gold and silver prices. Unlike headline inflation, favourable base effects are like to keep core inflation moderate over the next couple of quarters. In addition, the effects of the proposed GST rates change need to be monitored. Also, cheaper imports might also contribute to softer core.
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What conditions would justify a further rate cut, and how do you balance that against preserving policy space?
Obviously, if growth momentum falters, core inflation softens, and credit responds to lower rates, that’s a strong case for further easing. This also pre-supposes that the external environment is relatively stable, so that macro-economic trilemma does not lead to unintended consequences.
How do you assess the growth and inflation impact of recent GST rate cuts, and could this influence the policy stance?
This is just like the trade tariffs issue. Till a final recalibration of GST rates and baskets is finalised, it is difficult to take a rate view till the full implications of primary, secondary and tertiary effects are understood. The proposed changes should initially result in a fall in prices of most goods and services. However, with the higher disposable incomes likely to incentivise consumption demand, the second-round effects of output, investment and growth on the prices of at least some goods and services are difficult to predict. Since monetary policy decisions have to take a longer term perspective, the likely effects on inflation and consumption are somewhat contrary, and are likely to play out across different time scales.
In light of global central bank tightening, how does RBI maintain monetary autonomy while safeguarding domestic stability?
Most global central banks are actually cutting rates and easing policy, given the overall forecasts of trade disruption led economic slowdown. India’s current account deficit is at sustainable levels and our foreign exchange reserves are comfortable.
What are the key transmission channels through which US tariff actions and global trade tensions could affect India’s macro outlook?
Multiple channels are likely to transmit the effects of the tariffs. The direct one is obviously the partial loss of an export market, and those sectors which operate on volumes in a low margin exports. The secondary impact will be through factory and enterprise closures and cutback, resulting in job layoffs. The tertiary impacts will be the loss of disposable incomes and demand, which might in turn delay some investment decisions. The resultant growth slowdown, and a fiscal offsetting response might affect some foreign capital flows. How all these channel effects play out is difficult to predict.
How does one reconcile the need for monetary accommodation with the imperative to keep household savings attractive, especially amid a visible decline in net financial savings?
The importance of domestic savings is likely to increase, given the uncertainties on our external balance. All of these are exactly the reasons why I have been advocating a cautious, calibrated approach to policy easing. However, the recent upgrade of India’s sovereign ratings should be cause for optimism. The borrower–depositor trade-off hinges on interest rate dynamics, but the core issue is the real neutral rate, the equilibrium that balances savings and investment.