RBI Guv Sanjay Malhotra Signals Scope for More Rate Cuts if Inflation Undershoots

Reserve Bank of India (RBI) governor Sanjay Malhotra hinted that the monetary policy committee (MPC) may have room for further rate cuts if inflation remains below expectations. During an interview with Business Standard newspaper, Malhotra said that the MPC will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance.

The RBI has reduced the key policy repo rate by 50 basis points (bps) in the June review meeting and also changed its policy stance to neutral from accommodative. While doing so, Malhotra announced that the central bank is left with very limited space to support growth after that. The policy repo rate currently stands at 5.5%.

"As regards any future easing, while it will not be right on my part to pre-empt the MPC, if the inflation outlook turns out to be below our projections, it will open up policy space. As noted by the MPC, it will be carefully assessing the incoming data and the evolving outlook to chart out the future course of monetary policy in order to strike the right growth-inflation balance," Malhotra told the newspaper.

He further clarified that neutral, according to him, by definition is neither hawkish nor dovish and a change in stance does not imply an immediate reversal in the policy cycle. He said that it is a reflection of the current setting of monetary policy and how much more space it has to support growth. "We will continue to watch the incoming data on inflation and growth and take a call," he added.

Malhotra also aims to maintain adequate liquidity in the banking system to meet the productive needs of the economy and ensure smooth transmission to market rates, while avoiding the risk of fuelling an asset price bubble. He added that the central bank already has robust regulations and effective supervisory mechanisms in place to ensure that credit is deployed prudently.

India’s retail inflation eased to a 75-month low of 2.82% in May, compared with 3.2% in April. Meanwhile, food inflation eased below 1% for the first time in nearly four years.