RBI governor signals there's room for rate cut as inflation drops

MUMBAI: RBI governor Sanjay Malhotra said the central bank may consider cutting rates if both inflation and growth continue to soften, indicating that inflation could fall below the full-year forecast of 3.7 per cent.

The monetary policy committee's neutral stance, he said, provides room to respond as conditions evolve. "If inflation and growth both trend lower, it could justify a policy rate cut," Malhotra said in an interview to CNBC TV18. "But it depends on how the data develops. We are still in the process of updating our projections."The governor's comments come a day after retail inflation numbers came in at 2.1 per cent in June, with April to June averaging 2.7 per cent against RBI's estimate of 2.9 per cent.

July inflation is expected to fall below 2 per cent, and market forecasts suggest inflation for the full year may settle closer to 3 per cent.Malhotra said inflation and growth both weigh on policy decisions. "Our primary mandate is price stability, but we also factor in growth," he said. "We consider the composition of inflation... momentum, base effects... and not just the headline number. What matters more is how inflation is expected to behave going forward."

On the real interest rate, he noted the RBI considers both current and projected inflation. "The real rate is a guidepost, not a precise number.... (New York Fed President) John Williams describes the R Star (a term for the real neutral rate where monetary policy neither stimulates nor slows the economy) as a 'fuzzy blur' and not a bright point of light," he said, adding that the RBI estimates India's neutral real rate to be between 1.4 per cent and 1.9 per cent.He stressed the data-dependent nature of the central bank's approach. "The neutral stance allows for movement either way. If the inflation outlook shifts meaningfully, we can act. You're right that the street expects 3.3 per cent for FY26, and we'll soon publish our updated forecast. If inflation undershoots, the MPC will factor that in. We're data-dependent and will continue to assess the evolving outlook."On liquidity, Malhotra said the RBI is targeting the call money rate, which closely tracks the repo rate. "The operating target for monetary policy is the call money rate. We're not targeting the TREPS or market repo rates. That said, these markets are highly correlated," he said, citing a correlation of 0.98. He said recent variable rate reverse repo (VRRR) operations have helped push the call rate closer to the policy rate.Explaining the recent CRR cut, he said, "CRR is a monetary policy tool, not a prudential one like LCR. We've used it sparingly, only 1 percentage point out of a 4 per cent buffer over 12-13 years."