'Economic activity appears to have peaked in the second quarter of FY26, with industrial output, exports, and business confidence all softening from October 2025.'
While inflationary expectations remain well anchored, the prevailing inflation rate is too low for comfort, Nagesh Kumar, member of the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC), tells Manojit Saha/Business Standard in a telephonic interview.
What was the main reason behind your voting for a repo rate cut in the December policy?
The RBI-MPC has also cut the repo rate by 100 basis points (bps) to support the growth momentum, effected over the past year in a phased manner.
The transmission of these cuts to lending and deposit rates is by now nearly complete.
Hence, we found a case for a fresh cut of 25 bps, as the economic activity had peaked in the second quarter of the current financial year.
Fortunately, the inflationary situation has been very benign, providing policy space.
Headline inflation stood at 0.3 per cent in October 2025, with projections for the full year 2025-26 at 2 per cent. Inflation expectations remain well anchored.
Do you think growth peaked in Q2 of FY26, and that the second half would witness much slower growth?
The celebrations of this ‘Goldilocks moment' (high growth, low inflation), however, were tempered by trends for October 2025 published only a few days after the Q2 results, suggesting that economic activity had peaked in Q2.
Industrial activity began losing momentum in October 2025, reaching a 14-month low, with mining and quarrying contracting and manufacturing reporting only marginal growth of 1.8 per cent.
High-frequency leading indicators, such as the PMI for manufacturing, dropped from 59.2 to 56.6. Merchandise exports declined by 12 per cent in October 2025.
Export orders were at their weakest, bringing the New Orders PMI to a 12-month low.
The rupee came under pressure and breached the psychological barrier of INR 90 to a dollar.
The RBI's Industrial Outlook Surveys also suggest moderation in business assessment and expectations.
IMAGE: Nagesh Kumar.
Photograph: Kind courtesy, Nagesh Kumar/X
How is the delay in sealing a trade deal with the US hurting business? Has the MPC's December decision taken into account the delay in the trade deal with the US?
It is clear that geopolitical uncertainties, including those concerning the high Trump tariffs imposed on India and the possible delays in concluding negotiations to address them, have started to hurt business sentiment.
The Trump tariffs are particularly affecting labour-intensive industries such as textiles and garments, leather goods, gems and jewellery, and processed food products like shrimp that have higher exposure to the US market.
These are also sectors dominated by micro, small, and medium enterprises (MSMEs) and account for a disproportionately large share (around 40 per cent) of jobs in the manufacturing sector.
Hence, the high tariffs imposed by the US on India have the prospect of affecting MSMEs and employment significantly, as I had observed at the October 2025 MPC.
Therefore, the MPC found a case for supporting growth through demand stimulus to preserve growth momentum through the last quarter of the current financial year.
The growth stimulus should be coordinated across fiscal and monetary policy actions to be effective.
Is there scope for further reduction in interest rates?
I believe that the prevailing inflation rate is too low for comfort, breaching the lower bound of the flexible inflation-targeting regime, especially if precious metals like gold are excluded.
As we know, too low an inflation rate is not healthy for a developing country like India, as it suggests a demand deficit.
This provides policy space for a rate cut to stimulate growth. Future actions will be determined by data on the growth-inflation dynamics.
Feature Presentation: Rajesh Alva/Rediff
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