Key Takeaways

1. Monetary policy needs to recognise that this is a crisis period – a global economic war
2. Reduction in Repo rate can benefit to strengthen growth impulse
3. Lower Repo rates can help to smoothen external shocks
4. Inflation, as measured by CPI, especially food is below target
5. The transmission of earlier cuts in Repo rate has been robust
6. Need to strengthen export growth in face of aggressive protectionism
7. Fiscal Policy has a bigger role to play, especially targeted fiscal spends
8. A Dowish guidance will be useful for the markets
9. Likely pressures anticipated in BOP, affects markets

Recommendations of EGROW Shadow MPC

Members of EGROW — 4
Repo Rate
Pause – 0
Decrease – 4

• 25bps – 4

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

Major events that stand out in the last two months are the US Tariff shock and the partial counter through rationalization and reduction in GST rates. There is sufficient depth and diversity in our economy for policy to smooth shocks. Smooth high growth, as China achieved during its catch-up period, would be much more effective in reaching Viksit Bharat goals compared to fluctuating growth. Real rates are still restrictive, which is one reason construction growth still remains slow and consumer debt is onerous.

The feasibility of RBI growth support has increased since inflation will fall further with the GST cuts. RBI is likely to reduce its inflation forecasts. It had 4.4 as expected inflation in Q4FY26 but expected trend inflation, looking through base effects, was already running at below 4 percent.

Trend inflation below target implies output below potential. While government reforms raise potential output, monetary policy has to help output to reach that potential, otherwise government actions may be nullified. So RBI countercyclical support for growth is also required.

Moreover, pass through of repo rate cuts has reduced because of the rise in 10 year GSecs rates.

This is partly because of the market perception that a neutral stance implies no further cuts.

A 25bps cut and a dovish statement about further cuts being feasible depending on data, would help reverse this, even while retaining the neutral stance.

Adjusting LAF liquidity to keep the CMR near the repo, even as durable liquidity stays in surplus, also creates space for a further rate cut. A direct rate cut is better than reducing short rates through surplus liquidity since it reduces uncertainty and perverse incentives for markets. It is also in line with the flexible inflation target mandate.

A statement often made is that times are uncertain so policy space should be retained to move later. But this cannot be correct since real rates have exceeded equilibrium rates for more than a year now, building up stresses in the system. Since monetary policy acts with a lag, it has to be forward-looking in its actions.

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

The Indian economy has been hit by a demand shock coming from extreme protectionist measures in the US goods and labour markets. The impact is likely to be felt most severely in labour intensive sectors such as textiles, gems and jewellery. The possibility of a downturn in the economic cycle remains strong and the current situation needs to be characterized as a " mini crisis", satisfactory GDP estimates notwithstanding. While fiscal measures such as the rationalization of GST will help, more measures are needed to stem layoffs in these sectors.

As with all crises, monetary policy needs to play a complementary role with a combination of at least a 25 bps rate cut and targeted credit lines for the affected sectors. The stance of policy needs to change again in light of rapidly changing conditions to signal to the markets that the end of the rate cutting cycle is not near.

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

With inflation trending lower and not just in near term but also in FY27, the room for monetary easing has clearly opened up. The quantum of easing will depend on the downside risks to growth wherein the outlook is clouded with uncertainty from US policies.

With real rates high and the need to avert the hindrance to monetary policy transmission via the bond markets we see room for upto 50 bp of rate cuts.

More importantly to avoid wasting the rate cut impact it’s imperative to have a forward guidance signalling the ability to act further if needed. A rate cut without a dovish guidance may be counterproductive. I therefore recommend a dovish cut with the rhetoric of the policy statement suggesting further room for action or a dovish pause.

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

If we look at the global picture today, the environment is clearly very conducive. Commodity prices are stable, global food prices are steady, and crude oil weakened in August due to oversupply in the international market, dipping further in September. At the same time, gold prices remain consistently high, reflecting global uncertainty and the continued search for safe havens.

When we examine inflation trends across major economies, the picture is one of moderation.

In advanced economies like the US, inflation stayed high, with the US rate going up to 2.9 percent in August. Inflation in Europe and the UK stayed steady at around 2 percent to 3.8 percent. Japan’s inflation fell to 2.7 percent, the lowest since October 2024. In emerging markets, inflation is mostly going down. Brazil’s inflation is falling but still above the target. China is facing deflation again after two months of stable prices. Russia’s inflation is decreasing but still high. Against this backdrop, central banks across advanced and emerging economies are adjusting policy. New Zealand and Australia reduced their benchmark policy rates by 25 basis points each before holding them steady in subsequent meetings. The U.S. Federal Reserve has also undertaken a 25 basis point reduction. The European Central Bank kept rates unchanged, and the Bank of England has maintained them steady as well. In emerging markets, Indonesia, Mexico, and Thailand have each reduced their policy rates by 25 basis points.

So the global trend is unmistakable: with inflation subdued, monetary policy is turning accommodative. Central banks everywhere are using this opportunity to support growth.

Turning to the Indian economy, Agriculture has provided strong momentum this year. The sown area has increased in rice, pulses, and sugarcane. Rainfall has been above normal, and reservoir levels are very healthy — excellent indicators for the forthcoming rabi crop. Food buffer stocks are at comfortable levels, which strengthens supply-side conditions further. Together, these factors point to a highly positive agricultural outlook.

Industry is also showing encouraging signs. Production in July was robust, and early indicators suggest August remains strong. Core sectors such as coal and steel are both expanding, with steel offering a particularly positive signal for future infrastructure and construction activity. High-frequency indicators such as the PMI confirm that industrial activity continues to expand. Services, too, are keeping pace, reflecting broad-based strength across sectors.

Now, when we come to inflation, the picture is perhaps the most encouraging of all. In August, overall inflation increased to 2.1 percent from 1.6 percent in July, mainly because food prices stopped falling. Prices of some food items such as oils, eggs, meat, fish, and sugar rose, while cereals, fruits, milk, and soft drinks became cheaper. Vegetables, pulses, and spices continued to see price declines. Core inflation, which excludes food and fuel, rose slightly to 4.2 percent, mainly driven by higher gold prices. Inflation in rural areas rose to 1.7 percent and in urban areas to 2.5 percent. Most states recorded inflation below 4 percent, except for two states with higher rates. In early September, food prices showed a rise in cereals, mixed trends in pulses, an increase in edible oils like mustard and sunflower, and a decline in key vegetables such as tomatoes.

On the banking side too, we see overall strength. Credit and deposits are both growing steadily. However, the full pass-through of past policy cuts is still incomplete. If the decline in lending rates has been sharper in private sector banks than in public sector banks, while deposit rates have adjusted more fully in public sector banks. This uneven transmission underscores the case for further calibrated easing, so that policy benefits reach households and businesses more evenly.

In light of these factors, I strongly support the view that this is the right moment for further monetary action. A 25 basis point cut in the policy rate is well justified. Such a step will reduce borrowing costs, stimulate credit growth, and give a timely push to housing and private investment. Globally, accommodative policies are being pursued, and India should not miss this opportunity to align domestic conditions with international trends.

Additionally, lower rates can indirectly strengthen export competitiveness. In an environment of uncertain trade flows and tariff frictions, easing the cost of capital can help our exporters remain competitive. Most significantly, a rate cut will encourage the revival of the private investment cycle. Businesses are waiting for the right signal, and a lower interest rate could be the catalyst for them to expand capacity and drive growth further.

To conclude, with Q1 growth already at 7.8 percent and inflation at historic lows, we face a rare alignment of high growth potential and subdued prices. This combination justifies proactive monetary support. A 25 basis point cut is not only appropriate but also essential at this stage. It will sustain momentum, reinforce confidence, and set the foundation for stronger growth in the quarters to come.

Guest Panellists – Specialists from Market and Members from ASSOCHAM:

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

The effect of GST rationalisation will be very positive. Without rationalisation, inflation is currently around 2 percent. However, according to the SBI report, the GST reduction will lower CPI inflation by 60–70 basis points. This means inflation could fall to nearly 1.1 percent, which would be unprecedented—we have not witnessed such low CPI inflation since 2004. This sharp decline is expected to be visible as early as November, with benign inflation conditions likely continuing into FY 2026–27.

Given this backdrop, it is the right time for the RBI to consider a rate cut to sustain growth momentum and boost demand. The RBI’s policy approach has alwayds been to maintain a balance between growth and inflation, and the current scenario provides the space for an accommodative stance.

A 25 basis point cut is expected in the February meeting, followed by another 25 basis points in the subsequent policy round. Since February 2020, about 1 percent in repo cuts has already been utilised, bringing the repo rate to 5.5 percent. After another round of easing, the repo rate could be adjusted to 5.25 percent. Such a move would support growth, strengthen consumption, and reduce borrowing costs for households and businesses. With Q1 growth recorded at 7.8 percent, sustaining and extending this momentum requires further monetary accommodation.

2. Rajan Pental, Co-Chairman, ASSOCHAM National Council for Banking and ED, YES Bank Ltd.

The current stance will remain neutral. I do not anticipate any cuts at this moment, but there could be a possibility in December, depending on a couple of factors. Firstly, if inflation continues to decline, and secondly, to stimulate demand. The recent GST reduction has led to numerous advertisements in newspapers, and the 20 days of sluggish sales, driven by anticipation of the GST cut, have already created a pent-up demand. However, a major concern is the significant inventory (120 days' worth) held by automobile dealers, and how much of it they can liquidate by tomorrow. In the cement and steel sectors, manufacturers have already raised prices over the past two months. Additionally, many component manufacturers are facing higher GST rates, raising the question of whether we will see price revisions from October, or at the latest, December.

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

* In the last RBI policy RBI substantially reduced its inflation forecasts, but left growth forecasts unchanged.

* RBI since has sounded more confident on India growth and the GDP numbers released soon after the last policy saw a 130bps upward surprise.

* While underlying growth on a sustainable basis is much lower, one must remember that the bump up in GDP was on front loaded exports and statistical impact of a lower deflator

What should the RBI/Govt do?

* RBI has closed rate cut narrative in August but was still willing to cut when needed

* Given the lag in rate cut transmission a 25bps rate cut or even a front loaded 50bps and maybe even closing the cycle thereafter would see appropriate

* There is more visibility to consumption into the quarters ahead, more tha capex on a relative basis; arguing for front loaded rate cuts; especially given real policy rates hovering well above 400bps

* Reccommend close and proactive action on the liquidity front, given likely pressures ahead in the form of BoP, FX forwards etc...

* Given the recent rating upgrade, govt focus must be more on targeted fiscal spends and support in addition to liquidity and credit guarantees to affected sectors, containing the fiscal pressures of such action.

4. Shri Sujit Kumar, Chief Economist, NABFID

Since last policy review by MPC, developments on macroeconomic parameters have turned mixed.

While growth has been resilient, there remain significant challenges on horizon with US tariffs at penal highs, making $ 45bn exports at risk. Besides, H1B visa measures have also injected uncertainties on remittances front, going forward. India's external sector nevertheless remain manageable with services continuing robust so far.

Domestically, revisions in GST slabs have been positive to consumption, somewhat mitigating demand blows from external sector. There is need to continue support to domestic demand from all levers, fiscal as well as monetary. Capex momentum needs to be sustained from both centre and states.

Encouragingly, the inflation prints continue to be modest and with GST rate revisions likely to keep price pressures contained in near term. Further, the US Federal Reserve easing Federal Funds rate by 25 bps has allowed space for monetary accommodation, notwithstanding currency pressures, of late.

India's forex reserves remain healthy and moderate rupee deprecation in a challenging global order shouldn't worry monetary authorities much.

More worrying is reversal of interest rate transmission, especially in bond markets, where yields have gone up by 30 bps from pre-June 6th 2025 review levels. This yield reversal has more of global echos, nevertheless, it affects cost of capital for our enterprises, seeking alternatives in bond market.

Banks have also used this development to contain margin pressures and thereby somewhat slowed on passing rate benefits to borrowers.

We need monetary authority to signal the discomfort at current interest levels on markets, with 25 bps easing in repo rate and dovish commentary even though stance may be retained at neutral.