Recording of the Event

Key Takeaways

1. The economic performance of India, in terms of growth and inflation, is encouraging
2. The 2 Agreements, Indo - EU and Indo-US should strengthen trust in India
3. The market continues to suffer from high uncertainty and volatality.
4. There is need to maintain adequate liquidity in the economy for next 2 months
5. The Budget continues the path of consolidation
6. Capex and GFD are very close, indicating good quality expenditure in the Budget
7. Dovish regulatory communication and tone will play a major role in transmission of rate cuts

Recommendations of EGROW Shadow MPC

Members of EGROW — 5
Repo Rate
Pause – 4
Decrease by 25bps – 1
Stance – Neutral

Guests — 4
Repo Rate
Pause – 4
Stance – Neutral

Detailed Views by Members of the EGROW Shadow MPC

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

Although in Dec headline inflation rose it was only 1.3%, CPI core was 4.6%, but CPI core ex-gold continued below 3%. The RBI in December expected inflation to be around 3% in Q1 this year and to reach 4% by April. Market expectations are similar. Also the new CPI series to be released in mid-Feb may raise inflation slightly because the weight on food will fall.

Growth is above 7%, the EU and US trade deals will give a further fillip to growth. The situation is too volatile and will settle by the next MPC meeting, when directions will be clearer. So a pause is called for now.

The forward looking and growth supportive budget continues on the consolidation path., but since gross market borrowing exceeded market expectations the 10 year G-secs rose after budget reaching 6.77 on Feb 2. Yields did fall below 6.5 after the December 25 bps repo cut, but soon rose again because of large state borrowing in excess of market demand for SDLs and liquidity tightening with outflows.

This time policy must focus on injecting adequate liquidity, sterilizing the effect of outflows, although reversal of outflows is likely after the US trade deal announcement.

Communication and tone will play a major role in transmission of rate cuts. It must be dovish indicating whatever is needed in liquidity support and that there is still space available for further data-dependent cuts. Improving food supply chains, green alternatives to fuel oil and lower weight of commodities may imply long-term relief from commodity price spikes. The neutral stance should be retained. The last rate cut has made it credible with rate cuts for markets.

G-sec yields are sensitive to relative demand and supply as well as seem to be reluctant to give up a floor price for India. Spreads tend to rise while long rates do not fall as much as short rates when repo rates fall. But, as risks and price shocks reduce, that floor should fall. And appropriate communication is essential to induce that fall.

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

Abheek Barua struck a cautious note amid the prevailing optimism, arguing that while trade-deal headlines have lifted sentiment, the macro picture remains clouded by uncertainty—especially around portfolio flows and the underlying reasons for recent FII outflows. He suggested markets should “wait and watch” to see whether foreign investors’ bearishness was driven mainly by tariff risks or by deeper concerns, including India’s perceived lag in the current innovation and AI cycle. On trade, he warned that the EU’s non-tariff barriers and CBAM could dilute headline tariff gains, while an Indo-US deal may involve meaningful market-access concessions that could expose vulnerable domestic sectors. In monetary policy, he broadly aligned with the case for holding rates steady for now, prioritising clearer communication and improved transmission—specifically, guiding G-sec yields lower and ensuring adequate system liquidity to absorb heavy bond supply (including potential state borrowing). He also flagged downside risks to near-term consumption from implementation and transition frictions in employment/support schemes, while endorsing a larger, longer-run debate—echoing earlier development-central-bank thinking—on whether India should calibrate credit, liquidity, and rates to a higher long-term growth path rather than remain overly anchored to short-run macro management.

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

Upasna Bhardwaj strongly favoured a policy pause, arguing that a rate cut at this juncture would be ineffective and risk being wasted amid elevated volatility. She emphasised that the core problem lies not in the policy rate but in liquidity distribution and market frictions, particularly the lack of demand for government securities as banks reduce SLR holdings and institutional investors rebalance portfolios. Structural changes—such as adjustments to LCR norms, shifts in bank demand, and episodic tightness in system liquidity—have kept yields elevated despite RBI interventions. She stressed that RBI should prioritise durable and well-targeted liquidity provision, maintain a mildly dovish communication stance, and avoid even marginal hawkish signals. While inflation risks appear contained under the new CPI framework, she cautioned that growth may undershoot potential in the near term, leaving room for action later once volatility subsides and transmission improves.

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

Charan Singh argued that India stands at the cusp of an unusually favourable macroeconomic moment, marked by strong fiscal credibility, historically low NPAs, and the prospect of transformative trade agreements with the EU and the United States. While acknowledging that the Indo-EU agreement will take time to materialise, he stressed that the direction of policy and global engagement is clearly positive. With inflation well below the comfort level, growth momentum intact, and the banking system in robust health, he made a strong case for a calibrated 25-basis-point rate cut to reinforce the pro-growth intent of the Union Budget. Such a move, he argued, would support manufacturing, MSMEs, housing, and urban development, help India move from a 7.2% growth trajectory toward the 8.5% required for Viksit Bharat, and align monetary policy with the long-term development ambitions of the next two decades.

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

Siddharth highlighted how seemingly small technical changes in RBI’s reporting framework—specifically the shift from Reporting Friday to month-end reporting—have materially affected banks’ liquidity management. The new system has temporarily raised reported deposits and NDTL at quarter-ends, increasing CRR requirements and tightening short-term liquidity, which in turn pushed up money-market and CD rates during January. He welcomed RBI’s swift and adaptive response through instruments such as longer-tenor VRRs with prepayment options, viewing this as evidence of an effective feedback loop between the central bank and market participants. Given heightened volatility across markets, he argued against an immediate rate cut, while strongly supporting a neutral stance backed by clear communication that the easing cycle is not over. Sustained, nuanced liquidity management and credible forward guidance, he concluded, are critical to stabilising expectations and preserving market confidence.

Guest Panelists – Specialists from Market and Members from ASSOCHAM:

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

Subhash Aggarwal noted that the RBI’s monetary policy decision due on 6 February comes soon after the Union Budget and amid fast-moving external developments, especially the prospective trade agreements with the EU and the US. He argued that these trade deals are strategically important for India, given the scale of trade and the surpluses involved—highlighting India’s labour-intensive exports to the US (gems and jewellery, leather goods, and seafood) and pointing to strong trade engagement with the EU as well. Turning to the Budget, he described it as clearly growth-oriented, with an explicit push toward AI, digital infrastructure, semiconductors, and advanced manufacturing, and emphasised that the Finance Minister has supported this direction through incentives such as extended tax holidays up to 2047 for investors and a long tax holiday framework for GIFT City (IFSC). In this context—stable growth, contained inflation, and manageable global conditions—he concluded that the RBI should hold rates steady at this meeting, noting that policy rates have already been reduced substantially over the past year and that a further cut is not warranted right now.

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

Sujit Kumar focused on the weak transmission of past rate cuts, noting that while deposit rates have adjusted meaningfully, lending rates—particularly among public sector banks—have not followed suit. He argued that banks have used high bond yields as an anchor to preserve margins rather than pass on monetary easing, despite strong profitability. In this context, he advocated a pause on further rate cuts in the near term, combined with firmer regulatory communication and persuasion to improve transmission. He also flagged structural concerns arising from single-digit nominal GDP growth, which is dampening corporate investment appetite despite clean balance sheets. On public capex, he welcomed higher allocations but cautioned that excessive government-led spending—especially in railways—limits private participation. Strengthening market-based financing, especially through municipal bonds and better urban governance, was essential, in his view, to crowd in private capital and align fiscal and monetary objectives.

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

• The budget was broadly on expected lines, though both equity and debt markets were disappointed on budget day. The biggest positive is that aggressive consolidation is now behind us, and so is the drag on growth. So a minimal negative fiscal impulse.
• The budget continued to deliver on its commitment of fiscal consolidation, with clear focus on lowering India's cost of equity. All forecasts seem fairly credible and conservative with some upside possibilities on receipts, especially if nominal GDP growth positively surprises us. Budget capex is flat at 3.1% GDP, at the cost of continued RevEx consolidation.
• Now this seems a bit likely with the changes one is expected to see in the new GDP and CPI series with lower food inflation weights and double deflation in the new GDP series. However, we will need to see if this very double deflation adoption leads to some trimming of real GDP growth rates.
• One more bit on the budget that isn't appreciated enough is that the switch to debt/GDP means the fiscal deficit would remain flattish with a snail pace of consolidation touching 4% by FY31. And this would mean any nominal inflation mean reversion would translate into much higher absolute spends on the ground.
• Now on the RBI, it would be a fairly close call of 25bps of rate cut. While a cut might or might not happen. Market yields bottomed out well ahead. And rate cuts seem unlikely to help soften these yields. Do not see the need for RBI to cut rates now.
• Yields have started 2026 by retagging their relationship with crude fairly closely, after moving closely alongside the Rupee all through 2025. In short, 2026 could see pressure from yields from two key points: higher crude prices if it plays out and any pressures on the currency.
• Second concern is the capital account where FIIs are not seeing flows yet and FDI has not turned around as well. And therefore operationally pressure on the Rupee seems likely to remain.
• However, Indian equity market underperformance saw 2 sharp down legs. Firstly when the current US President was elected and second when tariffs were imposed. So it does seem that the recent US-India trade deal announcement could help FII flows in the near term. But we will have to wait and see how this plays out first.

4. Shri Raman Agarwal, CEO, FIDC

1. Need to Diversify Funding Sources – Refinance Mechanism for NBFCs

Hon’ble Finance Minister in her budget speech o 01st February informed that the vision for NBFCs for Viksit Bharat has been outlined with clear targets on credit disbursement. She has spelt this vision in her address at the Symposium on NBFCs organized by Ministry of Finance in New Delhi on 9th July, 2025 where she asked the NBFC sector to double their contribution to credit from the current level of 25% of bank credit to 50% of bank credit by 2047. To achieve this liquidity concerns of the NBFC sector need a long term redressal.

Today, NBFCs are majorly dependent on banks to the extent that RBI has voiced its concerns on over dependence on bank funding and stressed upon the need to diversify funding. As a result, many of the Upper Layer and higher Middle layer NBFCs have shown a surge in foreign borrowings. However, large number of mid and small sized NBFCs, who cannot access capital markets or foreign borrowings, continue to be largely dependent on banks and large NBFCs for funding.

Suggestion:

• There is therefore an urgent need to create a dedicated Refinance window for NBFCs to ensure a smooth and sustainable flow of funds that would also help address the concerns relating to asset liability mismatch. Funds raised through this mechanism may be exclusively used to finance MSMEs, priority sector and green initiatives.
• End use of Funds raised through this mechanism may be clearly defined so as to be exclusively used to finance MSMEs, priority sector and green initiatives
• SIDBI and NABARD may be entrusted the responsibility of Refinancing NBFCs and a specific fund allocation to these FIs must be made with a clear mandate to refinance NBFCs

2. Parity in Risk Weights for Housing Finance Companies (HFCs) and Non-Banking Finance Companies (NBFCs)

The Reserve Bank of India, through its draft circular dated October 7, 2025, has proposed significant changes in the risk weights applicable to various categories of loans extended by Scheduled Commercial Banks. Key proposals include:

• Reduction in risk weights for housing loans from the existing range of 35–50% to 20– 40% based on Loan-to-Value (LTV) ratios. Specific risk weights ranging from 30-60% have been prescribed for loans provided to individuals from the third residential dwelling unit onwards.
• Introduction of differentiated risk weights for Loans Against Residential Properties based on repayment source, ranging from 20% to 75%.
• Lower risk weights for unrated MSMEs at 85%, compared to the current 100%.
• Enhanced capital treatment for various retail and commercial lending segments that recognize risk differentiation based on underlying fundamentals.
• However, the risk weights applicable to HFCs and NBFCs under the HFC Master Directions and NBFC-SBR Directions, respectively, remain unchanged. The current framework prescribes:
• Housing loans for HFCs continue to attract risk weights of 35–75%, with higher risk weights of 75%/100% for loans provided to individuals from the 3rd residential dwelling unit onwards.
• Loans Against Property (LAP) exposures for HFCs attract risk weights as per existing guidelines, while NBFC LAP exposures attract 100%/125%.
• MSME lending by NBFCs continues to attract 100% risk weight for unrated exposures.

Suggestion:

We respectfully submit this representation to highlight the regulatory differentiation in the treatment of risk weights between Scheduled Commercial Banks (SCBs) and HFCs/NBFCs.

3. SMA Reportng: NBFCs Report to CRILC But Do Not Have Access to CRILC Data

The rationale for reporting Special Mention Accounts (SMA) to the Central Repository of Information on Large Credits (CRILC) is to enable early detection and reporting of financial stress in borrowers’ accounts. SMA categories help lenders identify accounts that show signs of stress before they turn into Non-Performing Assets (NPAs).

The CRILC was established by the Reserve Bank of India (RBI) to collect, store, and disseminate credit information on large exposures. Lenders are required to report credit information on all borrowers with aggregate fund-based and non-fund-based exposure of ₹50 million and above.

For access, initially, only banks were mandated to report to CRILC. Over time, Systemically Important NBFCs have also been brought under the CRILC reporting framework. This inclusion aims to bring more transparency and better risk management across the financial sector. However, NBFCs do not have access to the CRILC database.

Suggestion:

• NBFCs must be provided with access to the CRILC database to assist in credit risk management, like banks. Else, the purpose of bringing transparency and prevention of frauds gets defeated.
• It is logical and prudent to ensure that NBFCs have full access to a Central Repository to which they report to and thus contribute.