Mumbai: With data showing a steep decline in price rise in June, Reserve Bank Governor Sanjay Malhotra on Friday said that the outlook on inflation and growth will determine future rate cuts, making it clear that the current data will not influence the trajectory.
Speaking at the FE Modern BFSI Summit here, Malhotra also stated that the RBI’s rate cuts will not lead to asset bubbles and added that the central bank has more ammunition in its arsenal beyond rate cuts to help the economy.
It can be noted that the RBI has cut its key rates by 1 percentage point this year, and official data pointing to headline inflation cooling to 2.1 per cent against the 4 per cent target has led to expectations of further easing.
“Rate cuts will depend on the outlook for both growth and inflation rather than the current numbers,” Malhotra said.
“We have to remember that monetary policy works with a lag and hence outlook on the outcomes on key data like inflation for up to 12 months is kept in mind while taking the rate calls.”
He reminded that as per the current projections, CPI is expected to rise to 4.4 per cent in Q4, but admitted that the current outcomes suggest there will be a downward revision to the number.
Data available till June suggest that banks’ lending rates have declined by around 0.50 per cent this year, the same as the RBI’s rate cuts till then, signalling a complete transmission of the RBI’s decision.
The rate cuts are aimed at upping the credit growth, Malhotra said, exuding confidence that they will not lead to the creation of asset bubbles.
He said the 12.1 per cent credit growth for FY25 is better than the decadal average of over 10 per cent, but admitted that the number is trailing at around 9 per cent levels in FY26.
Malhotra assured the industry that the RBI will provide “the right macroeconomic conditions for growth” through its policies, liquidity stance and regulatory moves.
The shift in stance to “neutral” from “accommodative” suggests that the bar for delivering a rate cut is much higher now, Malhotra said.
When asked if the RBI has expended its tools to support growth very soon with the deep rate cuts, Malhotra said there is more ammunition in the RBI armoury and added that there are more tools available with the central bank, but declined to specify any.
Despite the cut in cash reserve ratio (CRR) to 3 per cent, the RBI will have sufficient funds to tackle any eventuality, he said, pointing out that even during the COVID crisis, it utilised only
1 per cent.
CRR cut is not just a liquidity move, but an attempt to reduce the cost of intermediation, which will help lower the borrowing costs as well, the governor said.
Meanwhile, the RBI governor welcomed the signing of the free trade agreement with the UK, saying it will help multiple sectors of the Indian economy.
Speaking at the FE Modern BFSI Summit here, Malhotra said multilateralism has “unfortunately” taken a back seat, and the country needs more such pacts (like the UK FTA) with countries and added that negotiations with the US are in advanced stages.
“Hopefully, it (UK FTA) should help us... that is the way going forward now, because unfortunately multilateralism seems to have taken a back seat,” Malhotra said in the central bank’s first comments on the trade deal with the UK signed in London.
“It should help various sectors in our manufacturing as well as on the services side,” Malhotra added.
Malhotra said that given the current realities, where multilateralism has taken a back seat, it is necessary for India to have more such pacts with other countries.
He also acknowledged that there are many more such pacts in the negotiation stage.
India and the UK signed the FTA during Prime Minister Narendra Modi’s two-day visit to the UK.
The agreement has been in the making for many years now and will open up markets for both countries across goods and services.