Recording of the Event

Key Takeaways

1. High uncertainty across the global and domestic economy
2. Black swain events are happening very regularly
3. Lack of high-quality data could be a factor for policy makers
4. Credit growth is higher than deposits.
5. MSMEs have been hurt badly and would need support
6. Cash flow of MSMEs is fragile and RBI could consider a mechanism to support liquidity
7. The financial eco-system of MSMEs has been disturbed and disrupt the payments schedule too. The commercial banks need to be more accommodative
8. Transmission of the previous cuts has yet not translated.

Recommendations of EGROW Shadow MPC

Members of EGROW — 5
Repo Rate – No change — 5
Stance – Neutral — 5

Guests — 6
Repo Rate – No change — 6
Stance – Neutral — 6

Detailed Views by Members of the EGROW Shadow MPC

1. Dr. Ashima Goyal, Former Member, Monetary Policy Committee, Reserve Bank of India

The Middle East war is causing widespread disruption, but there is an overreaction in markets and in commentary. In relative terms, the shock is not as large as past shocks. For example, if Brent at 112 is deflated by the CPI, it is 57 today. In June 2022, the deflated value peaked at 71 and stayed high that year. Only in March 2012 did the peak reach 130.

Meanwhile, there is a constant decrease in energy intensity and a large rise in the share of non-fossil fuel sources, which reduces dependence on oil. Moreover, it is not yet clear how persistent this shock will be. But even if it is, larger past shocks have been dealt with effectively. Markets seem to be overpricing risk. During the Ukraine conflict, oil prices stayed high for one year; the next year, they fell, inflation declined, and high growth continued.

At present, the government is absorbing much of the transient shock through countercyclical excise cuts, and the pass-through to domestic inflation is limited so far. The government has the fiscal space since the benefit of earlier soft oil prices was not fully passed on to consumers.

If the war persists, there is a clear policy playbook to be followed: maintain liquidity surplus and provide targeted support to vulnerable categories, but with automatic sunset clauses to prevent moral hazard.

Over the longer term, reforms should push the frontier of substitution and diversification, which will benefit over time. Various reforms, such as power distribution, have been delayed, but they may now be pushed through, which would be positive.

Coming to monetary policy, the natural interest rate will stay positive but will fall below unity. Since the starting point is renewed high growth, there is space. It is agreed that there is space today to pause and watch outcomes.

The stance should remain neutral to allow a data-based response as required. However, when markets are nervous, communication and guidance become very important. It is not enough to say that prices are stable.

For example, the INR is under pressure today. It must be ensured that markets clearly understand that the RBI is there to absorb volatility.

2. Ms. Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank

The uncertainty around the duration of the West Asia crisis and the lasting impact across inflation, growth, current account and INR continues to be the predominant factor for the policymakers. The inflationary risks are increasing and the persistent pressure on INR is prompting RBI to undertake aggressive measures. We expect RBI to continue to use some of the elements from the 2013 playbook, with a focus on targeted measures especially for the exporters and the MSMEs. For now, we don’t expect RBI to use interest rate hike as a tool for defending INR. We expect a pause on rates and stance for now, with focus on providing a clear guidance on the way forward. The tone of the statement will be key for markets to assess the policy reaction functions going ahead.

3. Shri Siddhartha Sanyal, Chief Economist & Head- Research, Bandhan Bank

The present economic environment is marked by an unusually high degree of uncertainty. Yet, despite the volatility, there is a remarkable degree of convergence in terms of what policymakers should do. In my view, there is very little room for any immediate change in either the policy stance or the repo rate. The Reserve Bank of India is unlikely to alter rates in the near term, and rightly so.

Instead, the emphasis at this stage must be on communication. Clear, credible and forward-looking communication from the RBI will be critical in shaping market expectations and preventing unnecessary anxiety. If policy support is eventually required, it may have to come through unconventional channels rather than through conventional rate cuts or hikes.

In many ways, the current situation is reminiscent of the early stages of the pandemic. The COVID-era playbook may need to be kept ready. The best outcome would be if there is no need to deploy it, but if the economic environment deteriorates further, policymakers may have to revisit many of the support measures that were used during that period.

One area that deserves immediate attention is the mounting pressure on MSMEs. Smaller enterprises are especially vulnerable in a period of uncertainty, rising costs and slowing demand. The challenge becomes even more serious when one examines where bank credit is flowing.

Overall bank credit growth today is around 14 percent year-on-year, fluctuating between 13.5 percent and 14.5 percent depending on the fortnight being examined. On the surface, this appears reasonably healthy. However, the composition of that credit growth tells a very different story.

Industry as a whole accounts for roughly 21 percent of total bank credit outstanding. Yet, its contribution to incremental credit growth over the last year has been only around 17 percent. By contrast, gold loans, which account for barely 2 percent of the credit stock, are contributing nearly the same amount — about 17 percent — to overall credit growth.

This does not mean that gold loans are growing at 17 percent. They are actually growing at well above 100 percent. Because of this extraordinary growth rate, a very small segment is now contributing disproportionately to the headline bank credit number.

The implication is important. If there had been no contribution from gold loans, overall bank credit growth would not be around 14 percent today; it would probably be closer to 11.5–12 percent. That changes the interpretation of the headline significantly.

Agriculture, for instance, is contributing less than 10 percent to incremental credit growth. Housing contributes around 12 percent. All industries taken together contribute around 17–18 percent. Against this backdrop, the rise in gold loans stands out sharply.

This raises an important policy question. Monetary policy is not only about controlling inflation; it is also about ensuring that credit flows to productive sectors of the economy. When a disproportionate share of credit growth is being driven by gold loans rather than industry, agriculture or MSMEs, it becomes necessary to ask whether the financial system is adequately supporting productive economic activity.

There is therefore a strong case for the RBI to consider additional administrative or regulatory measures to improve the availability of credit to industry, particularly to smaller firms. MSMEs need easier access to working capital and credit support during this phase. Even if the RBI does not announce any such measures immediately, it would help if the central bank provides guidance that it is aware of these risks and stands ready to act if necessary.

Equally important is the inflation outlook. There may be a temporary uptick in inflation in the coming months, but policymakers should avoid a knee-jerk reaction. Interest rate hikes in response to short-term supply-side pressures could prove counterproductive, especially if the inflation shock is temporary and linked to external events such as geopolitical tensions.

Corporate earnings are likely to come under pressure over the next few quarters. In addition, another factor will begin to affect inflation readings from October onwards. The favourable statistical impact of GST rationalisation, which has supported inflation numbers over the past year, will begin to fade. This base effect could create an additional upward bias in inflation even if underlying demand conditions remain weak.

That is why the RBI’s guidance in the upcoming policy will be more important than any immediate action. The central bank must communicate that it is prepared to tolerate a temporary phase of elevated inflation if it believes the shock is short-lived. There should be no attempt at a mechanical or defensive response through higher interest rates.

If, as recent indications suggest, the geopolitical conflict remains relatively short-lived, then the inflationary impact may also prove temporary. In that case, the priority should be to protect growth, preserve credit flows to productive sectors and support vulnerable segments such as MSMEs.

At this juncture, stability in policy rates and stance is the right approach. What matters most now is communication, preparedness and targeted support for sectors that are under strain.

4. Dr. Charan Singh, CEO and Director, EGROW Foundation

The ongoing geopolitical tensions in West Asia have complicated the economic outlook for India. In such an uncertain environment, the temptation for policymakers is often to react quickly, especially if inflationary pressures begin to rise. However, this is not the time for aggressive monetary action. The Reserve Bank of India should maintain the repo rate at its current level and retain a neutral policy stance.

There are several reasons for caution. India’s foreign exchange reserves have been declining, creating anxiety in financial markets. At the same time, bank credit growth has remained strong, while deposit growth has lagged behind. This gap between credit and deposit growth could create pressure within the banking system.

The exchange rate has also become highly volatile. The rupee has witnessed sharp swings in recent weeks, reflecting uncertainty in global markets. Such volatility makes it difficult to predict how external conditions may evolve in the coming months.

Globally, central banks have also adopted a wait-and-watch approach. Most major central banks have neither reduced nor increased interest rates, despite the risk of higher inflation. This reflects the fact that policymakers across the world recognise the uncertain nature of the current crisis.

One of the biggest fears from the West Asia conflict was a sharp rise in crude oil prices. There were concerns that oil prices could once again rise to $120 or even $140 per barrel. So far, however, that has not happened. Oil prices have remained relatively contained because there is adequate supply in the global market. The United States remains largely self-sufficient in energy, Russian oil continues to find markets, and supplies from countries such as Venezuela are also helping keep prices in check.

Gold prices, which usually rise sharply during periods of extreme uncertainty, have also begun to decline globally and in India. This suggests that markets do not yet see the present conflict turning into a large-scale war. Instead, there is a perception that the tensions may remain limited.

Even so, inflationary pressures cannot be ruled out. Fertilizer prices may rise because of disruptions in the supply of gas and oil. Since many countries require fertilizers during this period, any disruption could increase agricultural input costs. This, in turn, could push up food prices in India.

But if inflation rises because of higher fertilizer prices, food prices or other supply disruptions, then it would be supply-driven inflation rather than demand-driven inflation. In such a situation, increasing interest rates would not solve the problem. Instead, it could end up hurting growth and weakening already vulnerable sectors of the economy.

The sector that deserves the greatest attention in the current environment is the MSME sector. MSMEs do not have deep financial reserves and are therefore much more vulnerable to rising costs and prolonged uncertainty. Even if the current crisis is resolved in a few weeks, MSMEs would already have suffered significantly. If the conflict continues for longer, many of them could face severe financial stress.

This is especially important because MSMEs are closely linked to sectors such as steel, aluminium, fertilizers and other industrial inputs, all of which are already under pressure. Rising costs in these sectors will inevitably be transmitted to MSMEs, affecting their profitability, production and employment generation.

For this reason, policymakers should consider targeted support measures for MSMEs. One possible approach is interest rate subvention or concessional finance for MSMEs operating in sectors directly affected by rising input costs. India has traditionally used priority sector lending to support vulnerable segments of the economy, and similar measures can be used to help MSMEs during this period.

India cannot afford to compromise on growth at a time when it is pursuing the larger goal of Viksit Bharat. The need of the hour is a balanced and nuanced response. The RBI should keep the repo rate unchanged, maintain a neutral stance and avoid reacting prematurely to temporary supply-driven inflation. At the same time, the government and the central bank should work together to provide targeted support to MSMEs and other vulnerable sectors so that growth momentum is not derailed.

5. Shri Indranil Sen Gupta, Professor of Practice of Economics, Shiv Nadar University

We expect the RBI MPC to stay on hold given the pressures on the INR.

The INR faces 3 sets of pressures from 1. stronger USD, due to global risk off, 2. increasingly insufficient FX reserves (adjusted for gold revaluation and forwards/swaps and 3. a growing appetite for equity FPIs to invest in Korean and Taiwan tech. It remains to be seen how long the US-Israel-Iran conflict lasts and how oil prices move.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

1. Shri Subhas C. Aggarwal, Chairman and Managing Director, SMC Group

Once again, the government has asked the RBI to maintain inflation at 4 per cent, with a tolerance band of ±2 per cent, for the next five years from April 1, 2026 to March 31, 2031. This effectively renews the RBI’s mandate to keep inflation within the 2–6 per cent range.

In February 2026, the RBI kept the repo rate unchanged at 5.25 per cent. At that time, the economy was in a relatively comfortable position, with stable growth and moderating inflation. It was, in many ways, a Goldilocks situation, and there were expectations that the RBI might consider a 25 basis point rate cut in the coming meetings.

However, the escalation of the conflict involving Iran, Israel and the United States at the end of February has changed the outlook significantly. The global environment has moved from relative stability to one of heightened uncertainty, with the risk of much higher inflation.

Crude oil prices, which were earlier in the range of $60–70 per barrel, have now crossed $100 per barrel, with Brent crude moving above $105–110 per barrel in recent weeks. This sharp rise creates major risks for India through higher import bills, rising transportation and production costs, and broader inflationary pressures across the economy.

Given the continuing uncertainty around the conflict, it is difficult to predict when oil prices will stabilise. Inflation could move above the RBI’s 4 per cent target, and if it breaches the upper tolerance level of 6 per cent, the central bank may have to think about raising rates rather than cutting them.

That said, the RBI should not raise the repo rate in the current meeting. It would be prudent to keep the repo rate unchanged at 5.25 per cent and maintain a neutral stance. In February, the RBI had already decided to keep the repo rate unchanged at 5.25 per cent with a neutral policy stance.

The RBI, which was earlier considering a gradual reduction in rates, is no longer in that position. Over the next two or three policy meetings, the emphasis is likely to remain on caution rather than easing. Much will depend on the trajectory of oil prices, inflation, and the duration of the geopolitical conflict.

Globally too, major central banks such as the US Federal Reserve and the European Central Bank are largely maintaining a wait-and-watch approach. The ECB recently kept its key rates unchanged, citing the war in West Asia as a major source of upside inflation risks and downside risks to growth.

Alongside interest rates, the RBI is also likely to focus on liquidity management. It may continue using banking system liquidity measures to ensure that markets remain orderly and that financial conditions do not tighten excessively even if inflationary pressures rise.

2. Shri Arjun G. Nagarajan, Chief Economist, Sundaram Mutual

Expect the RBI to stay on hold on rates. However, more focus is likely on domestic liquidity, and most importantly, more measures to help stabilise the currency further.

Market yields last year were indicating rate hikes to start mid-2026. However, statistical cycles apart, rate hikes at this juncture would weaken the underlying growth and therefore are most unlikely.

Expect the geo-political uncertainty to remain unabated at least until Jun'26. Even though inflation remains subdued, post Jun'26, pressures could start to emerge.

And from this stand point, there does seem a small probability of rate hikes, to start end 2026.

One must remember that elevated Crude and Natural gas prices are expected to seep into higher Emerging Market (EM) inflation eventually.

While Asian EM economies are seen to be the most exposed, within the EM space (energy + food), India appears to carry the highest weight in its retail inflation metrics.

And therefore there is need to be on guard.

While it is too early to forecast a growth impact at the moment, one must remember that production normalisation post the impact would be gradual.

If one were to stress test for a worst-case scenario, India does have positive macro buffers to resist any deterioration.

The first positive for India at the current juncture, when compared to the Russia-Ukraine crisis, is a much lower retail inflation (CPI) level experienced currently. CPI inflation currently stands just above 3 percent. This is well below the 7.8 percent inflation peak witnessed during the Russia-Ukraine conflict in 2022. Fiscal arithmetic needs a lot of focus and one must resist undoing the good work of consolidation over these years. Therefore windfall gains could be revisited alongside excise duty hikes to an extent, during the recovery stage in small amounts.

All of the RBI's energies must be around the Rupee as this could change the inflation and fiscal metrics very quick, alongside foreign investor sentiment. The RBI must give serious thought to a 2014-like NRI bond issuance or something similar in impact. Especially given India's capital account flows (esp.FII and FDI) continue to remain weak.

3. Shri Sujit Kumar, Chief Economist, National Bank for Financing Infrastructure and Development (NaBFID)

From my perspective, the current monetary policy debate has reached an unusual point of consensus. There is now broad agreement that changing either the policy rate or the stance at this stage may not be necessary. The larger concern is not whether the repo rate should move by 25 basis points, but whether policymakers can reduce uncertainty in financial markets and restore confidence.

The headline credit growth numbers may appear high at around 13–14 per cent, especially when nominal GDP growth remains in single digits. At first glance, this may create the impression that there is an urgent need for stronger credit expansion. However, a closer look at the disaggregated data tells a more nuanced story.

One of the more important trends is the rise in unsecured business loans. This suggests that businesses are finding alternative ways to access finance even when lending rates are not declining as quickly as expected. If the value of collateral such as gold or property has increased, borrowers are naturally trying to leverage those assets to obtain more credit. From the borrower’s perspective, this is a rational response to market conditions rather than a sign of financial stress.

At the same time, I remain concerned about nominal GDP growth. While real GDP growth of around 7 per cent continues to look healthy, single-digit nominal GDP growth creates discomfort for bankers and lenders. Loan decisions are based on future revenue expectations, and when companies project only modest revenue growth over the next five years, lenders naturally become cautious. For banks, stronger nominal GDP growth provides greater confidence that firms will be able to generate the revenues required to service debt.

There is, however, one comforting factor. Imported inflation risks appear somewhat less threatening than they did earlier. Wholesale price inflation tends to respond quickly to imported inflation, but India is now in a much stronger position than it was a decade ago. The economy has become more resilient through successive shocks such as the COVID-19 pandemic and the war in Ukraine.

India’s dependence on oil is also gradually declining in relative terms. Over the last decade, the size of the economy has quadrupled, while oil consumption has increased by only around 150 per cent. This suggests that renewable energy additions and greater efficiency are slowly reducing the economy’s vulnerability to oil price shocks. Investors and markets should therefore be careful not to apply the same pessimistic assumptions used for other emerging economies to India.

In my view, financial markets have become overly pessimistic about India. Currency depreciation and market volatility seem excessive when judged against the country’s economic fundamentals. India remains one of the fastest-growing major economies in the world, and a one-month disruption should not be extrapolated too far into the future. Growth of around 7 per cent has become the new normal, and temporary shocks should not distract us from that larger trend.

That is why I believe the Reserve Bank should avoid changing its policy stance at this point. The best contribution monetary policy can make right now is to avoid adding to uncertainty. Instead of focusing narrowly on repo rate cuts, policymakers should pay greater attention to the disorderly conditions in bond markets and loan markets. Corporate bond yields remain elevated, government security yields are still above 7 per cent, and bank lending rates are not falling because banks continue to price loans against alternative borrowing costs available to customers.

The real issue in the bond market is a structural mismatch between supply and demand. Over the last few years, the government has increasingly issued longer-duration securities. Traditional buyers such as insurance companies, pension funds and provident funds prefer long-tenor bonds, but demand in this segment may now be approaching saturation. Meanwhile, the expected foreign demand for Indian bonds has not materialised to the extent anticipated.

Open market operations remain a conventional tool for the RBI to absorb excess supply and stabilise yields. However, stronger organic demand for bonds will only emerge when bank deposit growth improves and banks once again have the balance sheet capacity to increase their investment holdings. Over the last year, banks have prioritised credit growth over investments, which has further added to bond supply pressures.

Looking ahead, I believe these pressures may begin to ease by June or July. The first half of the financial year is usually packed with government borrowing, but if liquidity conditions improve and demand for bonds recovers, yields may gradually come down. Whether they can fall decisively below 7 per cent remains uncertain, but the worst of the current stress may not last indefinitely.

Ultimately, I remain more concerned about nominal GDP growth than about real GDP growth. For India, inflation that is too low can be as problematic as inflation that is too high. Moderate inflation supports stronger nominal growth, improves corporate revenues, and creates healthier conditions for credit expansion. That is why policymakers should focus less on immediate rate cuts and more on creating an environment where growth, revenues and confidence can recover together.

4. Shri Raman Agarwal, CEO, FIDC

The debate on interest rates is largely settled for now. The more pressing issue is the condition of MSMEs and the role that the NBFC sector can play in supporting them during a period of uncertainty. The current situation undoubtedly calls for support measures, but more importantly, it requires a rethink of how regulations are designed for small enterprises.

At the heart of the problem is the fragile nature of MSME cash flows. Small enterprises and borrowers are extremely vulnerable to disruptions. These disruptions can arise from events within the family, within a village or community, or from broader shocks such as natural disasters, pandemics, wars, or other black swan events. Whether the trigger is local or global, the result is the same: cash flows are severely affected.

In my view, most of the support measures announced in difficult times amount to temporary patchwork. They provide short-term relief but do not address the underlying issue of fragile cash flows. What is needed is greater flexibility in regulations so that repayment structures can be aligned with the actual repayment capacity of borrowers.

The experience during COVID-19 offers an important lesson. During the pandemic, there was a moratorium on loans. However, as an industry body, we had argued that a one-time restructuring of loans without downgrading asset quality would have been a far more effective measure. This is not a new idea; the RBI has previously allowed one-time restructuring for MSME loans without classifying them as weaker assets.

The difference between a moratorium and restructuring is significant. Suppose a borrower has an EMI obligation of Rs 100 but, because of temporary stress, can only afford to pay Rs 50. A moratorium would mean that the borrower pays nothing at all. A restructuring, on the other hand, would allow the EMI to be recalibrated according to the borrower’s current cash flow situation. Such an approach is more practical and far more sustainable.

The larger point is that regulations should move away from rigidity and become more flexible. This applies not only to restructuring but also to the way NPAs are classified.

A few years ago, the RBI made it mandatory for NBFCs to classify an account as an NPA immediately upon the completion of the 90th day of overdue payment. Earlier, there was some flexibility. For example, if a borrower’s due date was on the 20th of the month and the 90-day limit ended on that date, NBFCs could often wait until the end of the month before taking a final call. This flexibility mattered because many small borrowers tend to receive their collections in bulk towards the end of the month.

For MSMEs, repayment patterns are rarely smooth and predictable. They are linked to business cycles, seasonal demand, collections, and local circumstances. A rigid system of NPA recognition does not always reflect the realities of small business operations. Once again, there is a strong case for bringing flexibility into the regulatory framework.

The role of NBFCs in MSME lending has also become increasingly important. RBI data itself shows that the share of NBFCs in MSME lending has been rising much faster than that of banks. This is because NBFCs are often able to provide tailor-made solutions, faster decision-making, and a more personalized approach to borrowers.

Given this reality, there is a strong case for providing direct liquidity support to NBFCs rather than routing funds through banks. When liquidity is routed through banks, it increases the borrowing cost for NBFCs, which ultimately gets passed on to MSMEs in the form of higher lending rates. A direct liquidity window, perhaps through a refinance mechanism, would significantly reduce costs and help NBFCs support MSMEs more effectively, especially during difficult times.

There is also a tendency to view the recent increase in gold loans with concern. However, this issue needs to be understood more carefully. A substantial portion of gold loans is not being taken for consumption. Many borrowers use gold loans to run small businesses, manage working capital, or meet temporary business requirements.

Gold loans remain one of the quickest and easiest ways to access credit. Since gold is an asset whose value tends to appreciate rather than depreciate, lenders view it as one of the safest forms of collateral. Borrowers can therefore access loans quickly and at reasonable interest rates. In many cases, gold loans are helping sustain small businesses rather than financing consumption.

Finally, there is an important issue concerning the NBFC sector itself. It is often said that there are nearly 9,000 NBFCs registered with the RBI. However, there is reason to believe that this figure may not reflect the actual state of the sector.

As part of our work in the sector, we have been reaching out to NBFCs using contact details available in RBI records. Our experience has been that nearly 25 to 30 per cent of emails bounce back. This raises an important question: how many of these registered NBFCs are genuinely active and reporting?

There appears to be a significant number of companies that are either inactive, not reporting, or are simply not traceable. There is therefore a strong case for deregistering or cancelling the licenses of entities that are no longer active. Such a clean-up would strengthen the sector, improve transparency, and ensure that serious and compliant players are not unfairly burdened by the presence of inactive entities.

The NBFC sector has emerged as an essential pillar for MSME financing in India. But if it is to play that role effectively, there must be greater flexibility in regulations, direct liquidity support, a better understanding of instruments like gold loans, and a serious effort to clean up the sector itself. Only then can NBFCs provide the kind of support that MSMEs need in a period of growing economic uncertainty.

5. Shri Anil Bhardwaj, Secretary General, FISME

The Middle East crisis is not just a geopolitical event for India’s MSMEs; it is an immediate business and survival challenge. Across sectors, especially among exporters and manufacturing clusters, the disruptions have already begun to affect cash flows, working capital cycles, input availability, logistics costs and energy prices.

As the representative of the Federation of Indian Micro, Small and Medium Enterprises (FISME), which brings together around 740 MSME associations across sectors and geographies, I have seen growing anxiety among enterprises that are struggling to absorb these shocks.

The first and most direct impact has been on MSMEs that export to the Gulf region. Businesses supplying to countries in the GCC, including Iran and other West Asian markets, are facing severe delays in shipments and payments. Several MSMEs also use the UAE as a transit point for exports to African countries. These supply chains are now disrupted.

In some cases, consignments have been offloaded and stranded at ports such as Dubai, with goods lying unclaimed and accumulating damages. Exporters are facing uncertainty over whether they will receive their payments at all. While alternative ports and shipping routes may emerge over time, such decisions are largely in the hands of shipping companies, not MSMEs.

The second major impact is on manufacturing units dependent on gas and energy supplies. Many industrial clusters have shifted to PNG and gas-based energy systems because of environmental regulations and the push toward cleaner production. However, suppliers have already raised prices sharply and are warning of possible cuts in supply of 20% to 30% if the Middle East situation worsens.

This is increasing production costs and squeezing margins. The impact may not yet be visible in revenues, but it is certainly hitting the bottom line. If the situation persists, it will eventually affect working capital cycles, delay deliveries and undermine the ability of MSMEs to honour their contracts.

The crisis is also exposing the limitations of the current banking framework for MSMEs. In normal times, the Special Mention Account (SMA) framework may serve a purpose. But during an extraordinary disruption like this, it becomes excessively rigid. Even a small delay in repayment can trigger account classification, withdrawal of banking facilities and legal action.

We cannot afford to have viable MSMEs pushed into distress because of temporary external shocks beyond their control. Accounts should not be persecuted during a crisis period. Banking facilities should not be suspended and legal proceedings should be avoided against firms that are fundamentally viable but temporarily affected.

There is therefore a strong case for immediate policy support. First, the government and the banking system should consider providing an interest subvention of 3% to 5% on working capital loans for 12 to 18 months. Second, an emergency credit line scheme similar to the one introduced during the Covid-19 period could be revived. Additional collateral-free loans, perhaps up to 20% of outstanding credit, would provide crucial liquidity support.

Third, there is a strong demand from MSME clusters for a moratorium on principal repayments for six to twelve months. One-time restructuring of loans should also be allowed, because crises of this nature leave a trail of financial stress that often becomes visible only after three to six months.

There is another issue that requires urgent attention. A significant number of MSMEs supply to government departments and public procurement systems. Under current policy, 25% of central government procurement is reserved for MSMEs. This creates a large and important market for them.

However, if supply chain disruptions continue, many MSMEs may not be able to meet delivery deadlines or contractual obligations. Unless the government provides temporary exemptions or extensions of three to six months, these enterprises could face penalties, blacklisting and financial stress, even though the delays are caused by circumstances beyond their control.

India’s MSMEs have shown extraordinary resilience over the years, whether during the pandemic, supply chain disruptions or periods of weak demand. But resilience does not mean limitless capacity to absorb shocks. Without timely support from the government, RBI and financial institutions, many enterprises could find themselves under severe stress.

The need of the hour is not just sympathy, but swift and targeted action. MSMEs are central to India’s economy, employment and exports. Protecting them during this crisis is not merely an act of relief; it is an investment in the country’s long-term economic stability and growth.

6. Shri Madhav Nair, Co–Chairman ASSOCHAM, National Council for Banking and CEO-India, Bank of Bahrain and Kuwait

My recommendations are as follows

In the current macroeconomic environment, a calibrated and cautious approach to monetary policy is warranted.

1. Policy Rate: Status Quo Recommended

Given the prevailing uncertainties, particularly arising from the evolving geopolitical situation in West Asia, the full economic impact is yet to be clearly ascertained. In such a scenario, maintaining the current policy rates would provide stability and support growth during potentially volatile conditions.

2. Growth Considerations

India’s growth momentum, while resilient, faces emerging headwinds:

Maintaining rates at current levels would help sustain domestic demand and investments during this period of uncertainty.

3. Inflation Outlook

Inflation remains benign and within the RBI’s tolerance band, trending close to the 4 percent target. Recent excise duty cuts have provided a buffer to consumers against fuel price volatility.

Given this backdrop, there is no immediate inflationary pressure warranting a rate hike unless the West Asia crisis prolongs

4. MSME Sector Support

The MSME sector is likely to be among the first to experience stress due to:

Impact of Trade tariff disruptions and now the West Asia crisis

To mitigate this: adequate and affordable credit flow to MSMEs remains critical and support measures such as interest subvention schemes may be considered

5. Policy Stance

A neutral policy stance is appropriate at this juncture, allowing flexibility to respond to evolving domestic and global developments without prematurely tightening or easing financial conditions.

Conclusion

It is recommended that the RBI maintain the current policy rates and retain a neutral stance, while remaining vigilant and responsive to future macroeconomic developments.