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Impact of India's large rate cut may be limited, says rate panel member
The MPC delivered a larger-than-expected 50-bp rate cut in June to bolster economic growth as inflation remained below target.
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Reuters - Tue, 24, Jun 2025
- 01:32 EDT
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Reserve Bank of India (RBI) Governor Sanjay Malhotra arrives at a press conference in Mumbai, India, June 6, 2025. / REUTERS/Francis Mascarenhas
The immediate incremental impact of an additional 25 basis-point rate cut delivered earlier June 2025 by the Reserve Bank of India's monetary policy committee may be relatively limited, external member Saugata Bhattacharya told Reuters on June 23.
The MPC delivered a larger-than-expected 50-bp rate cut in June to bolster economic growth as inflation remained below target.
ALSO READ: India bets on growth with steepest rate cut in five years
"Interest rates transmission also works through a transfer of disposable incomes across various economic stakeholders," Bhattacharya, the only member to vote for a 25-bp rate cut said while sharing his personal views.
He said the most crucial shift will be to micro, small and medium enterprises (MSME) and home loan borrowers from retail depositors.
"These shifts are likely to accumulate over the course of the year. How the relative marginal propensities to consume and save play out will determine inter alia changes to the credit multiplier and hence deposit and loan growth," he added.
Bhattacharya said inflation is likely to align with the RBI's 4 percent target on a durable basis in the coming quarters.
"Although the overall picture remains mixed, many high-frequency economic indicators also suggest continuing growth resilience," he said, adding that the RBI's forecast of GDP growth at 6.5 percent for fiscal year 2026 precluded the need for a deeper rate cut given current global uncertainty.
There may be space for more "good news" rate cuts, but Bhattacharya said he would "prefer a more gradual and calibrated path over this easing cycle".
The RBI's June policy actions should be seen as a step towards propelling growth to a higher aspirational trajectory, Governor Sanjay Malhotra had said in a post-policy briefing, adding that the country would like to achieve 7-8 percent growth.
Bhattacharya said he would like to assess the effects on aggregate demand from the government's policy initiatives, particularly income tax cuts, as well as price and income support on demand revival.
Short-term money market rates and overnight rates being closer to the floor of the monetary policy corridor is appropriate at this point to accelerate the transmission of the policy rate into bank lending and deposit rates, Bhattacharya said.
Once transmission begins to align with the intended easing cycle, liquidity can then be calibrated, which the RBI has done in the past through various instruments to bring overnight rates closer to the policy rate, he added.
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