Key Takeaways

1. Inflation is under control, with core inflation below 4%.
2. Rupee has been stable for last few quarters.
3. Growth is weakening, with weak credit and export performance.
4. Credit transmission is slow, especially in rural and informal segments, despite RBI’s liquidity support.
5. Microfinance lending has shrunk by ₹1 trillion, but loan quality has improved.
6. Recent rate cuts are still transmitting, especially in variable-rate and EBLR-linked loans.
7. CRR cut can enhance liquidity and support credit delivery where it's lagging.
8. There is room for at least a 25 bps cut, but it must be well-timed, as several external risks are currently at play.

Recommendations of EGROW Shadow MPC

Members of EGROW — 5
Repo Rate
Pause – 3
Decrease – 2

• 25bps – 2

Guests — 4
Repo Rate
Pause – 1
Decrease – 3

• 25bps – 3

Detailed Views by Members of the EGROW Shadow MPC

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

A neutral stance indicates a response based on incoming data. Transient volatility in food prices can be looked through. But many high frequency signals indicate growth softness and there are continuing negative global impulses.

One argument is that since RBI’s expected Q4FY26 inflation is 4.4%, real rates are already near unity with respect to that. But the expectation that inflation will rise next year is largely due to base effects. Core inflation is the long-term trend towards which the more volatile headline inflation reverts. And core inflation ex-gold has been less than 3.5 per cent for more than a year. It is better to assume that inflation is anchoring at the 4% target and work with that as expected inflation. Then another up-front cut in the policy repo rate is warranted. Cutting 25bps will bring the expected future real rate closer to unity. Moreover, after many months of being over 2% mild over-correction on the other side is acceptable.

Forecasters are too habituated to thinking in terms of base effects and past behaviour. But falling Indian trend inflation has to be factored in.

A question being asked currently is whether monetary adjustment should be fast or slow. Front-loaded adjustment is required if large shocks or inadequate past adjustment have allowed real rates to deviate too far from equilibrium. Small steps are better if the adjustment is to expected future changes and guiding market actions will help reach the objective. The argument for waiting and seeing effects cannot be correct since monetary policy has long lags.

Since real rates were allowed to rise too much last year, growth is slowing and inflation has fallen to the RBI’s lower bound. The natural real rate is likely to be below unity now. But, despite the 100bps cut, the current real rate is still above 3%. If inflation had been correctly forecasted and adjusted to last year, real rates would not have risen to these levels. So big cuts this year were required and current data suggests space for another cut of 25bps.

Although a better mix between bank and market-based lending implies pass through of policy rates is faster and perhaps more stable, it is still not instant. So time must be allowed to assess the outcomes of policy actions, without pushing policy to over-react. But conditions, including external, are benign for a protracted easing cycle defined by low but positive real policy rates in order to raise Indian growth to its non-inflationary potential. At this stage only fine-tuning is required.

Over-reaction must also be avoided in liquidity infusions. While durable liquidity is better kept in surplus under the kind of exogenous liquidity shocks we face, there are tools available to adjust short-term liquidity to keep the weighted average call money rate near the repo. It is good the RBI has started using these, since the mandated anchoring of short-rates at the repo reduces uncertainty in markets. An upfront 25bps cut is better than easing through excess liquidity.

2. Shri Abheek Barua, Former Chief Economist, HDFC Bank & Independent Economist

1. There is a palpable economic slowdown in which non-monetary factors play a key role.
2. Monetary accommodation has been both large and frontloaded.
3. The efficacy of further accommodation is doubtful
4. Addressing non-monetary factors through monetary means could dilute credit quality significantly and pose stability challenges.
5. Rupee weakness is also a reason to limit accommodation.
6. Vote for pause and neutral stance.

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

We stand at a juncture where growth remains on a softer footing and inflation remains benign, even though mostly led by food inflation. Such a scenario does create room for further monetary easing. If RBI was to solely focus on the domestic factors, then we see a compelling case for another 25bp cut.

However, given the recent fall in INR amid trade deal uncertainties, we see the odds of rate cut in August policy diminishing.

We see that the window for further easing is gradually diminishing as real rates are expected to drop below 1% in the months ahead.

RBI has frontloaded monetary, and liquidity easing measures and should now await transmission and further details on trade related disruptions before easing further.

While risks are evenly balanced, I expect a pause in the upcoming policy.

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

India’s current monetary policy environment supports a pause in the repo rate, especially after a cumulative 100 basis point cut in the last four to six months. Liquidity in the system is already comfortable, and additional infusions are expected in the coming months, making further immediate easing unnecessary.

Macroeconomic indicators remain favourable. Inflation has eased, and the rupee has been stable over the past few quarters. The domestic economy continues to grow steadily, and while a supportive monetary environment is needed, aggressive rate action at this point could be premature.

A key feature of this cycle is the growing share of EBLR-linked loans, particularly among private banks. This has led to faster transmission of rate cuts into lending, suggesting that the recent easing is already working its way through the economy. Further cuts may not provide a significant boost to long-term investments, which are more sensitive to broader economic and geopolitical stability.

However, caution is warranted. In FY23–24, banks and NBFCs saw a rapid rise in credit growth, particularly unsecured, small-ticket loans in tier 3 to 6 towns, often directed at new-to-credit borrowers. This trend raises concerns about the sustainability of credit expansion and financial stability.

A pause in the repo rate is appropriate at this stage. With inflation softening, liquidity ample, and credit transmission effective, it is prudent to let previous actions play out. A reassessment next quarter could allow room for a 25-basis point cut if conditions remain favourable.

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

The tariffs by the US on India will impact our exports A couple of sectors are going to be affected—textiles, electronics, gems, and jewellery, auto components and machine equipments while Pharmaceuticals and energy are insulated because they are exempted. The US consumer will face higher prices in their market. Obviously, India will diversify and find alternate markets, probably focusing more on the Global South. We had earlier sent delegations to various countries, and maybe India will strategically explore those markets to diversify. However, given that India as long term trade relations with the US and Europe, Indian producers will definitely face challenges.

The US is clearly focussed on their economy, despite low unemployment rate of around 4 percent and inflation of 2.5 percent, which is very close to the target of 2 percent. It is well known that there is a supply-side story in the inflationary trend in the Advanced Economies since COVID and start of the Russia-Ukraine war.

It also needs to be noticed that tariffs are pushing up prices in some categories of goods, but there is total uncertainty about where and how much it will affect overall prices. Thus, there is uncertainty out there. The Fed is open to this being a one-time tariff rise but are not sure, and they feel that price pressures could persist in some areas, and therefore, the risks must be managed. Hence the Fed did not change the policy rate on July 31, 2025.

Given this scenario, I am not sure whether the market will see a rate cut by September in the US, but I feel we should not tie ourselves too closely to the US stance. Just because they have not changed their rate does not mean we have to follow; we should remain steadfast in our approach. The real rate of interest in India is very high, and we should be able to make our own decisions independently. There are bouts of uncertainty globally, and perhaps they are dealing with a mess of their own making.

In Advanced Economies like the Eurozone, inflation is around 2.5 percent and in the UK, it is approximately 3.1 percent. Given this inflationary pressure, there is limited scope for coordinated easing. India will likely have to navigate these challenges alone, considering our own domestic circumstances and evaluating where we are headed.

Real Economy is presenting a mixed trend. The monsoon is performing well. As a result, agricultural production is expected to be strong, so I am not too concerned about the farm output. However, when it comes to manufacturing, the situation doesn’t appear very promising. I was looking at the latest Index of Industrial Production (IIP). In IIP manufacturing, this time the data for April-May is showing that growth is only about 2.8 percent compared to 4.6 percent in the previous year. So, I think we need to be worried about that. Substantial growth is taking place in industries such as electrical equipment, machinery and equipment, and motor vehicles, which is something we would have expected. Rubber and plastic products are also growing. It is a matter of concern that our core industry is not really picking up the way we would have expected - cement and steel are doing well but crude oil, coal, natural gas, fertilizers, and electricity are not performing well.

On the financial sector, when it comes to credit expansion in the banking sector, if I look at year-on-year data for 2024 and 2025, the growth rate for bank credit is around 9.8 percent this time whereas previously, it was around 14 percent.

On prices the WPI is in the negative zone. In the CPI, there has been a decline in vegetable prices. Our overall inflation is at 2.1 percent in June 2025. If we look at CPI food inflation, it is less than 1 percent. Fruits and edible oils have recorded slightly higher prices, but vegetables have shown a substantial decline. One thing that is causing some worry is inflation differential within the states where inflation pressures are varying significantly. Andhra Pradesh has 0 percent inflation, Bihar is at 0.75 percent, Punjab at 4.7 percent, and Kerala at 6.7 percent.

The high-frequency indicators also exhibit mixed results - retail automobile sales are showing 4.8 percent growth in June, though in May it was 5.1 percent, so there’s a slight dip. Tractor sales in June 2025 recorded 8.7 percent growth as compared with 28.6 percent in June 2024. Finally, merchandise exports and imports have contracted, year-on-year in June 2025.

Recommendation for a rate cut

Given the persistence of weak demand indicators and the need to maintain a conducive economic environment, I believe we should continue lowering interest rates, considering the high real interest rate and the stiff global situation. Each economy is now focused on its own interests without much regard for global coordination. While we are a small economy in the global context, even though we are the fastest-growing large economy, I would recommend continuing to press for a reduction in the repo rate. If not a substantial cut, at least a signal is necessary. Even a 25 basis points cut, if not 50 basis point, would convey the message that we are committed to supporting domestic industry and ensuring a growth-friendly monetary policy regime.

Guest Panellists – Specialists from Market and Members from ASSOCHAM:

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

CPI inflation is expected to lower than 3 percent means RBI must consider.

I vote for reduction of 25 basis points in repo rate. RBI must change stance from neutral to accommodative again. Tariff rate imposed by USA at 25 percent and penalty may have impact.

Reduction of export to USA by 10 percent and this reduction in GDP by 20 basis.

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

RBI monetary policy a very close call.

RBI Governor's guideline has been lower than forecasted inflation and growth.

Even without the recent tariff pressures from last night, India growth would comfortably be below the RBI's 6.5%.

Given that the Governor has been pre-emptive in all his earlier RBI policies, I don’t see why this policy should be different.

Given that another 25bps of rate cuts is a given, with uncertainty just around the timing, I would think an RBI Aug'25 rate cut would seem likely given the time lag in policy.

Stance would remain neutral and expect the RBI to retain the same.

With this RBI rate cut, given the Fed hasn't moved, the policy spread would shrink further; increasing the chances of a dry FII debt inflow for the year.

This brings us back to the financing of our deficit and the pressures it would place on the currency. Given poor financing options, from the point of view of markets, there could currency concerns for markets in the near term.

Addressing the elephant in the room on the tariffs it seems unlikely that the 25% is here to stay.

Agri, dairy and the google tax are points India is pushing back on. So even outside of tariffs 25bps appears reasonable.

If the tariff fear materialises, given the limited fiscal space, rather than another 25bps, more targeted liquidity related measures may probably be more warranted.

And on credit, we see that corporates are sitting on cash and if they need to borrow, they tap into the bond market at lower rates, probably disintermediation of sorts. And on top of this there is pressure on credit from global growth and tariffs.

3. Shri Sujit Kumar, Chief Economist, NABFID

Global growth prospects are seen somewhat better as trade borne uncertainties settle down, albeit with US tariffs at elevated levels. The IMF has revised its growth prospects in July update of World Economic Outlook. Global PMIs signal improved activity even as front loading of trade played in Q2, 2025.

The US Federal Reserve opting to maintain status quo on funds rate signals caution on price situation as tariff situation evolves.

Coming home, high frequency indicators remain mixed on growth outturn in Q1FY26, albeit with a downward bias. Monsoon rains have progressed well though uneven regional spread warrants caution on regional level price dynamics. Industry output growth remains moderate, especially mining and electricity. Vehicle sales remain encouraging.

Credit growth has fallen to single digits, signalling demand concerns weighing on loan demand.

In a liquidity surplus environment, banks risk chasing borrowers sacrificing margins. More worrying is lenders dropping guard on credit risk, playing opportunistically and mispricing risk just to build balance-sheet. Large corporates are sitting on cash, preferring to deleverage than build new capacity. Retail seems saturated while MSMEs might be seeing lending in comfort of government guarantees.

Seen from inflation perspective, there is space to ease policy rates by 25 basis points further. However, from financial stability perspective, there is merit in being watchful on easing rates at this juncture, taking pause in upcoming policy meet with readiness to ease if situation evolves better.

We expect the MPC to keep policy repo rate as well stance unchanged in upcoming review.

4. Shri. Sadaf Sayeed, CEO, Muthoot Microfin Ltd.

India’s monetary policy must now strike a careful balance between supporting domestic demand and navigating external pressures. One of the key positive signals for India is that the U.S. Federal Reserve has held its rates steady. This provides India with some room to ease without risking large-scale capital outflows. With global investment flows remaining broadly supportive and the domestic inflation trajectory trending downward, India can afford to focus more intently on stimulating domestic growth, particularly in credit-starved segments of the economy.

A major concern highlighted is the bottleneck in credit dissemination. Despite ample liquidity created by the RBI, there has been a noticeable slowdown in disbursals since the last financial year. This has affected cash flows, especially in rural areas, where unmet demand persists. A strong monsoon and an expected healthy crop season should boost the ability of rural borrowers to service debt and demand new credit, but banks have been slow to extend fresh loans. The recent rate cut has yet to fully transmit through the system, transmission typically takes about six months and much of the incremental lending has not occurred at revised lower rates.

In this context, a cut in the CRR would further ease liquidity and, if paired with a 25-basis point repo rate cut, could improve credit availability. Such measures would not only support rural consumption but also revive confidence among lenders and borrowers alike. Particularly in the microfinance space, reforms such as limiting client exposure to three active loans have led to a reduction in over-leveraged borrowers, with exposure to such customers falling to just 8%. The overall size of the microfinance industry has contracted significantly from ₹4.4 trillion to ₹3.5 trillion indicating a cautious stance by lenders. However, this deleveraging phase may now be turning a corner, with minimal delinquency and a more sustainable credit profile emerging.

Additionally, regulatory changes—such as reducing the qualifying asset requirement for microfinance institutions from 75% to 60%—have allowed them to diversify portfolios and improve balance sheet health. With better credit quality, stabilizing rural demand, and signs that overleveraging concerns are receding, the coming quarters (Q3 and Q4) could see a meaningful pick-up in credit.

In view of the persistent challenges in credit transmission, sluggish disbursal, rural credit demand, and improving macroeconomic indicators, a 25 basis point cut in the repo rate accompanied by a CRR reduction would be a well-calibrated policy move.