Further rate cut today runs the risk of an overdose, says RBI MPC member Ram Singh

Another rate cut at this juncture runs the risk of an overdose, especially when the effects of monetary and fiscal measures are still playing out, Ram Singh, external member of the central bank's Monetary Policy Committee (MPC), tells Rozebud Gonsalves and Alekh Angre in an interview.

Singh, who voted on October 1 for a status quo in policy rates but favoured a change in stance to 'accommodative' from 'neutral', said it is important to track both nominal and real GDP growth because they both serve different analytical purposes. He also said that low levels of inflation are not good for businesses, as they impact both investment and employment decisions. Edited excerpts:

If the space to ease rates further is limited, would it be better to cut now, from a transmission perspective? Or, is RBI waiting for downside risks to growth to materialise before taking a decision to lower rates?

There is ample scope for an additional rate cut. The question is: Is there a need for one right away? When the impact of the demand boost from the 100 bps cuts in repo rates this year is yet to play out fully, a further rate cut today runs the risk of an overdose.

In the first two quarters of this fiscal, the economy has been pump-primed with several monetary interventions to boost demand and credit growth - 100 bps cut in policy rate, 100 bps CRR cut, and substantial micro and macro prudential norms for the banks and NBFCs. Transmission of monetary easing is still underway. Transmission has been broad based across sectors and channels (Banks, NBFCs and Bond market) but is still incomplete. Even without any further cuts, the front-loaded rate cuts riding on the remaining CRR cuts will further facilitate monetary transmission. Besides, there have been two major fiscal interventions - income tax reliefs and GST rationalization & rate reductions.

Several indicators suggest that these measures are having intended effects demand and private investment intentions. When already administered policy doses are working well, there is no immediate need for an addition dose of further rate cuts. We should let the existing interventions work through the system. In the meanwhile, hopefully there will be better clarity on the tariffs front as well.

Many have argued that the GDP deflator has added to real GDP growth in Q1FY26, as WPI is used to deflate certain services. Should one focus on nominal GDP then?

We should look at them both. Both nominal and real GDP are important and serve different analytical purposes. A focus on just one over the other would provide an incomplete picture.

Nominal GDP provides a better picture of current economic activity because it reflects market value of goods and services produced in the current prices, which is important for businesses' budgeting, revenue forecasting., and debt calculations. In sectors like banking, asset growth is often compared to nominal GDP. The same is the case with the public debt-to-GDP ratios. Despite the concerns over weights assigned to WPI in GDP deflator, the real GDP remains vital for comparing economic performance.

Headline inflation is at a more than 8-year low in September. Full-year inflation, too, is tracking below RBI's estimates. Are you worried about the rise in real policy rates resulting in monetary policy becoming less supportive to growth?

Yes, I am. Such a low level of inflation is bad for the top and bottom lines of business, leading to lower profits and reduced revenue growth, and it increases the real value of debt. None of these is good for businesses activities, including their investment and employment decisions.

As to public finances, low inflation increases the real value of the public debt and puts a strain on government finances. As government's total debt situation is often assessed as a percentage of GDP and low inflation slows the growth of nominal GDP, it causes the ratio of debt-to-GDP to increase, signaling a worsened fiscal situation.