India's Central Bank Can Cut Rates Further, But With Caution, Says Rate Panel Member

By Siddhi Nayak and Ira Dhugal

MUMBAI (Romero.my.id) – India still has space for additional interest rate reductions due to decreasing inflation and high uncertainty surrounding economic growth. However, any further monetary easing must be carefully measured and implemented cautiously, according to an outside member of the nation’s committee responsible for setting rates who spoke on Tuesday evening.

Saugata Bhattacharya stated in an interview that future policies aimed at easing conditions—such as reducing interest rates and injecting more liquidity into the market—might ultimately shift the relationship between growth and inflation. This change would particularly occur as economic recovery nears its maximum capacity, consequently intensifying inflationary forces.

Bhattacharya stated that he believes this is still quite far off.

The Monetary Policy Committee of India, comprising three representatives from the Reserve Bank of India along with three outside experts, reduced the primary repo rate by 25 basis points to 6% back in April. They also shifted their policy stance to "accommodative" from "neutral." This marks the committee’s second interest-rate reduction for this year.

The RBI also lowered its GDP growth estimate for the current fiscal year to 6.5% from 6.7% amid U.S. tariff policy flip-flops, which have roiled financial markets.

Under Governor Sanjay Malhotra, who assumed office in December, the central bank has injected substantial liquidity into India’s banking sector with the objective of stimulating economic growth and facilitating the efficient passage of policy rate changes.

Since the beginning of 2025, the RBI has injected liquidity totaling 6.21 trillion rupees (approximately $73 billion).

The plan is to purchase bonds totaling 1.25 trillion rupees in May, anticipated to reduce the cost of overnight interbank loans, essentially functioning like a reduction in interest rates, say financial experts.

This preemptive injection of funds should help reassure the market that there will be enough liquidity, according to Bhattacharya.

Bhattacharya suggested that maintaining an excess liquidity level of approximately 1% of total deposits, possibly a bit more, could be suitable throughout the loosening phase.

Given the new government expenditure, system liquidity could potentially surpass this (1%) threshold temporarily, and I am fine with that.

He mentioned that unlike interest rates, liquidity can be more easily adjusted and reversed if inflation starts to rise.

Bhattacharya anticipates a faster pass-through of interest rate reductions to customers over the coming two quarters, since most banking loans are tied to external reference points.

($1 equals 85.1270 Indian Rupees)

(Reported by Ira Dugal and Siddhi Nayak; Edited by Mrigank Dhaniwala)