After a 50 bps rate cut, what gives you confidence of two more rate cuts in CY25 and do you think that is going to happen?
Aurodeep Nandi: One, 50 basis points is unorthodox. Typically, you would do these kinds of rate cuts when there is a growth emergency and there is a need for monetary policy to readjust itself soon. So, 50 basis points cut to commit to getting CRR down to 3%, these are typically emergency level initiatives that are taken. So, it is a little puzzling that the RBI has done this. And what is also interesting is the change in stance. It was neutral earlier, in April it was turned to accommodative, and then probably in the fastest flip-flop we have seen in a while it has gone back to neutral.
Now, with all of these developments and with Governor Malhotra essentially saying that we do not have any more space or very little space currently, it sets the bar really high for an August cut because you have already delivered so much and it makes sense now to see where policy transmission leads you to. Now, the question is, is this the end or is there more to come and then that boils down to what your macro outlook is.
Now, broadly speaking, our view is that on GDP growth we will undershoot the RBI’s projection. So, RBI is projecting 6.5%, our projection is 6.2%. Even on inflation, we think there is going to be an undershoot. RBI is projecting 3.7% for FY26, our number is around 3.3%. So, there is going to be an undershoot on growth, undershoot on inflation, which actually means that there is A) space to cut and B) there is a need to bring policy not just at neutral levels, but also to accommodative levels. We did some simulations with what is known as the theoretical framework called Taylor rule and we actually see rates moving even lower, which is why we have two more rate cuts pencilled in not in August but in October and December.
But I just wanted to have your take on inflation. Believe that your inflation forecast stands at 3.3% which is below the RBI estimate of 3.7%. You did touch upon this factor, but what is giving you that confidence to have a difference of 40 basis point between your estimates and the RBI’s estimate. Which segment do you believe will help this number to keep it lower? Maybe it is food inflation or something else. A new CPI series is expected to be published from the first quarter of 2026, so what changes do you expect there?
Aurodeep Nandi: That is two questions. Let us address the first one. In terms of why we think inflation is going to be lower, look at the starting point. We are expecting that the next CPI print which is going to come out this week is going to be below 3%, our forecast is 2.8%. So one, the starting point is pretty low. On the food inflation side, we have pretty good rabi crop production because we had good monsoons last year. So food inflation has been climbing down. It is not just vegetables, pulses are also down, there is a negative month-on-month growth rate. So, if you look at the food components, it seems like there is a broad-based slowdown in inflation that you are seeing on a month-on-month basis. If the expectation is that monsoons will be fine this year, again that should eventually be a positive for food prices.
Soon the demand-supply side, it is positive on the food side. On the core inflation side, it has been relatively weak for almost a year-and-a-half now. We are barely seeing much sequential momentum there and this could be a mix of a lot of factors. It could be weaker demand, it could be the impact of cheaper Chinese imports, it could be lower commodity prices globally.
We expect core inflation will remain range bound through FY26 which is where we are seeing the inflation dynamics actually undershoot the RBI’s 3.7%. Mind you, even 3.7% is a sharp cut from RBI’s own projection in the April policy, which unless I am mistaken was around 4% or so. So, there is scope for inflation to actually be lower than what the RBI is currently projecting. In terms of the new CPI series, look, it is difficult to say because there could be new ways of capturing data.
For instance the way the ministry captures house rent or airline fares could be different. There are reports that the government may be tapping into online sources of data. That is a black box as of now. Once we get that series, it would be interesting to see if there are some categories that are taken out because it is no longer relevant, some categories coming in, how they are collecting data for the various categories and it would help then to kind of do a back testing of okay with this CPI basket how would inflation be in the past and then where is it tracking now.
I guess, we will do that exercise when it comes, but as of now we have to peg policy based on the current CPI basket.I want to address the liquidity concern that we are seeing in the economy because if you take the present case scenario, everything looks good on paper. The inflation is under control. We are expecting a good monsoon. Liquidity in terms of money supply looks robust now. But along with 50 bps cut, we have also seen a 100 bps slash in CRR. Could this lead to excess liquidity in the system and then the RBI might have to step in to soak up some of it?
Aurodeep Nandi: There are a lot of scenarios that can happen. The counter to this is that RBI also has a net shot FX forward book which, if it needs to take care of that, would counter the liquidity that is being infused from this CRR side. The CRR cut is going to bring in around Rs 2.5 trillion and actually, the amount of liquidity that has come into the system, but from the RBI side is pretty large.
You can start comparing it to the amount of liquidity that came in during the pandemic level. So, I do not think there is a debate that the RBI is trying to make liquidity flush in the system to bring rates down and then, in the process help credit growth pick up. That seems to be the broad strategy. The issue of whether liquidity is more or less will depend on the durable driver) to and fro of liquidity and also, how much the transmission goes through. So, best case scenario, RBI frontloads so much easing, it passes through the system and credit growth picks up and then this is a successful experiment.
The other conjecture and the other point that you were making as to why so much frontloading, do you think it also could be a hedge against just purely tariffs and the repercussions of it all or do you think it could be something domestic too?
Aurodeep Nandi: It is difficult to say because what the governor said was that our aspirational growth rate is 8%, we are at 6.5% and so we should be doing it. Now, the argument economists are generally used to is whether your current growth is above or below potential growth, which in case of India would be around 6.5% to 7%. The ambition out here seems to be that let us frontload and then let us push transmission through and then hope that credit growth picks up.
What is slightly worrisome on the margin is that if indeed growth does not respond well, if it is because of domestic reasons or tariff related global reasons, then the RBI will again have to look into its arsenal and see what they have left to attack growth which is where our idea is coming that maybe at that point there is 50 basis points more of cuts in the system, but as of now, it seems more of a frontloading ploy.
There does not seem to be anything in the concurrent data to suggest that growth is soft, but it is not showing growth jumping off a cliff. It seems it is more from the policy transmission side which the RBI is looking at.
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