Neutral stance gives flexibility to move up or down

Nagesh Kumar, an external member of the Reserve Bank of India's (RBI's) Monetary Policy Committee (MPC), says in an email interview with Manojit Saha that if inflation stays around 3 per cent, there would be additional room to manoeuvre, assuming a real interest rate of around 1.5 per cent. Edited excerpts:

- Nagesh Kumar

The market was expecting a 25-basis point (bp) cut in the policy repo rate, but the MPC has surprised with a 50-bps reduction. What was the reason behind it?

Since the February 2025 MPC, the RBI has started to support growth by cutting policy rates. The repo rate has been cut by 50 bps in two instalments, besides a massive liquidity expansion. The monetary policy stance was also changed to accommodative in April 2025. However, the transmission of the monetary easing has been slow or moderate, as reflected by the sticky deposit and lending rates, and credit growth has been moderate.

In the April MPC, I had argued that a 50-bp cut at one go may be more effective than two cuts of 25 bps each. In view of difficult external circumstances requiring support for economic growth, and a favourable inflation outlook providing headroom for further rate cuts, the case for a 50-bp cut in the repo rate had become stronger at the June MPC meeting and hence received wide support.

A double dose of rate cuts has already demonstrated quick transmission, and deposit and lending rates have started to fall considerably. Hence, it is likely to spur investment and consumption of durables.

What was the reason for changing the stance to neutral?