The Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) recently decided on a substantial 50 basis points (bps) cut to the repo rate, a move intended to stimulate economic growth by lowering borrowing costs and encouraging investment. However, not all members of the MPC were in complete agreement regarding the magnitude of this rate cut. Saugata Bhattacharya, an economist and external member of the MPC, expressed a more cautious stance, favoring a smaller 25 bps reduction.
Bhattacharya's rationale for a more tempered approach stemmed primarily from the "elevated uncertainty" that continues to pervade the global economic outlook. He noted that the MPC's statement itself contained multiple references to "uncertainty" and "volatility," which, in his view, warranted a more gradual easing of monetary policy. While acknowledging the Indian economy's resilience and growth performance, he advocated for a "calibrated policy easing path," citing the experience of periodic GDP data revisions as further justification for caution.
Despite his call for a more gradual easing, Bhattacharya concurred with the committee's decision to shift the monetary policy stance from accommodative to neutral. This change in stance signals a move away from actively injecting liquidity into the system and towards a more balanced approach that allows for flexibility to either cut, pause, or even hike rates depending on evolving economic data and global conditions.
Bhattacharya also highlighted the importance of the RBI's ongoing liquidity support measures, suggesting that these measures could have a more significant impact on monetary transmission than a deep cut in the repo rate. Since January 2025, the RBI has injected a substantial amount of durable liquidity into the banking system, which has helped to lower money market rates and reduce banks' overall cost of funds. In this context, he believed that the RBI's assurance of continuing this liquidity support would be more effective in facilitating transmission than a more aggressive rate cut.
While Bhattacharya acknowledged that the near- and longer-term inflation forecasts offered more room for easing, he also recognized that the transmission of previous policy rate cuts into bank lending rates had accelerated post-March 2025 and was expected to continue apace. He awaited further insights into the effects of recent income tax rate cuts and other price and income support measures on the demand side of the economy.
The MPC's decision to implement a larger-than-expected rate cut reflects a broader consensus among its members that decisive action is needed to support economic growth in the face of moderating inflation. The majority of the committee believed that a front-loaded rate cut would provide a clear signal to economic agents, boosting consumption and investment through lower borrowing costs.
However, Bhattacharya's dissenting voice serves as a reminder of the complexities and uncertainties involved in monetary policy decision-making. His emphasis on caution and gradualism underscores the importance of carefully considering the potential risks and unintended consequences of aggressive policy easing. The impact of India's large rate cut may indeed be limited in the short term, as Bhattacharya suggests, and a more measured approach may ultimately prove to be more effective in achieving sustainable economic growth while maintaining price stability.
