Key Takeaways

1. Global uncertainty continues to prevail extensively.
2. A rain deficit is still expected, but it has moderated.
3. CPI trending above 4 percent while WPI is above 9 percent.
4. FER are ok, but less than 1 year of import cover.
5. Oil prices are fluctuating widely.
6. Major Advanced economies could harden policy rates.

Recommendations of EGROW Shadow MPC

Members of EGROW – 6

Repo Rate – No Change – 5; Reduction of 25 basis points – 1
Stance – Neutral

Guests – 4

Repo Rate – No Change – 4
Stance – Neutral

Detailed Views by Members of the EGROW Shadow MPC

1. Ms. Ashima Goyal, Emeritus Professor, IGIDR and Former Member, Monetary Policy Committee, RBI

June headline inflation came in above 4% but core-core inflation was only 2.5%, implying there is no sign of generalized excess demand.

Commodity price shocks are also waning although uncertainties continue: the monsoon deficit is down to 15% in July compared to 40% in June. Planting has picked up strongly. Intl fuel oil prices are in the 80s—the value MPC assumed in the last MPC was 95; so their headline forecasts should reduce.

Putting core forecasts in the public domain is helping moderate analyst inflation expectations, despite volatile commodity prices, as it is increasingly recognized that volatile components revert to a more stable trend. Firms' pass-through of commodity price spikes has also fallen in the inflation targeting regime.

Growth has held up well despite global shocks, but there is some softening. Moreover, youth unemployment is high, contributing to social unrest. There are signs of a broad-based revival in private sector investment cycle that needs to be supported.

Keeping policy steady and supportive to counter global shock is essential for this. Given high levels of uncertainty, which are likely to resolve over the next two months, a data-based pause and continuation of the neutral stance is best.

The measures in the last policy are enabling banks to raise interest rates for NRIs and help solve the mismatch in deposit and credit growth without a general rise in interest rates.

G-sec yields are also softening, and the INR has more support, which is most important for fixed income flows. Interest differential with the US has come down but is adequate as inflation and risk differentials narrow. It still exceeds the average EM spread of 200bps.

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

We expect the RBI MPC to pause in its August 5, 2026 policy.

The RBI has expectedly shot the silver bullet of NRI bonds (FCNR(B) deposits with full swap) in the last policy, with FX Reserves at a relatively low US$550 billion (adjusted for forwards/swaps/gold revaluation). We also welcome the overdue removal of uncompetetive taxation on foreign institutional investors.

The market will wait to see if it hits the bull's eye of, say, US$50+ billion in end-September, with depreciation running well above the 2.5% long-run average.

We do not expect the RBI MPC to react to agflation due to the rain shock.

We do not expect to see any clear direction in global uncertainties in the immediate future. November's US mid-term polls remain an event risk.

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

We expect the MPC to pause on rate and stance in the upcoming August policy. However, the resilience in growth and uptrend in inflation in months ahead is likely to provide a hawkish bias to the guidance.

The global backdrop remains highly volatile, with geopolitical risks reinforcing elevated inflationary risks prompting key central banks to hike rates. Fed maybe on its way to hiking rate in the September FOMC. This may further put pressure on already narrow interest rate gap and thereby posing risk of exacerbated capital outflows.

Having said that, the volatility in crude oil prices and risk of commodity price shock pass-through to core inflation suggests that forward guidance for policymakers is restricted to one meeting at a time. Much of the decisions are going to be data dependent. We see room for MPC to hike repo rate by 50bp in 2HFY27, as real rates remain dismally low with 4QFY27 inflation expected to average 5.3%.

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

No change in stance, pause in repo rate.

5. Shri Abheek Barua, Independent Economist and Former Chief Economist, HDFC Bank

I vote to keep the rate on hold irrespective of the Fed outcome and guidance. My baseline scenario is of range bound energy prices and one hike by the Fed in H2 cy2026.

The RBI's forward guidance should emphasize the importance of data flow and the impact of events, keeping options on both sides open with no bias.

6. Dr. Charan Singh, Chief Executive, EGROW Foundation

The economy is in good shape. Rainfall has been deficient and kharif sowing is behind, yet the picture is divided rather than uniformly adverse. Paddy remains above its normal seasonal area, and buffer stocks in rice are adequate. The difficulty is concentrated in pulses, coarse cereals, oilseeds and cotton. That is a real concern, with consequences for food prices over the coming months, and the oilseeds position deserves particular attention given the emphasis placed on that crop at the highest level of government. But distress confined to four crops, set against comfortable stocks in the staple, is not the signature of an economy generating broad-based price pressure. It is the signature of a weather event, and weather events are what tolerance bands exist to accommodate.

The wider price data support that reading, though not in the direction usually assumed. Consumer price inflation at 4.38 per cent sits alongside wholesale price inflation of close to ten per cent, and the wedge between the two indices continues to widen. The conventional treatment casts the wholesale number as a leading indicator, with the implication that retail inflation must eventually climb to meet it. A more careful reading suggests something else. A widening wedge during a commodity shock is evidence that pass-through from producer to consumer prices is being absorbed rather than transmitted — that firms are compressing margins instead of raising prices. That is precisely the behaviour a credible targeting regime is designed to induce, and it argues for confidence in the framework rather than alarm at a single print.

Elsewhere the domestic picture is unremarkable in the best sense. Industry is performing well, with further data due shortly. The fiscal position remains on its consolidation path and warrants no particular concern. The financial sector, on the evidence of the Financial Stability Report published at the end of June, is in sound condition: the banking system is robust, credit growth is strong, and non-performing assets stand at very low levels. Two qualifications belong alongside that assessment. Deposit growth continues to lag credit growth, and has done so for some time. More pointedly, household debt is rising and gold loans are expanding at a compound annual rate of forty-two per cent, driven substantially by repeat borrowers pledging against a higher gold price. Rapid growth in secured lending to households that are returning to the same collateral is not, on its own, a systemic risk. It is, however, the kind of development that is easier to address early than late.

A related question sits beneath the aggregate credit numbers and is too often obscured by them. Credit growth is strong, but strength in volume says nothing about price. For micro, small and medium enterprises, availability of funds has not been the binding constraint for some time; affordability has. An aggregate credit series that looks healthy can coexist with a segment of the productive economy that is being rationed by rate rather than by access, and the distinction is invisible unless it is deliberately looked for.

The external account is where genuine discomfort lies. The rupee is approaching ninety-seven to the dollar. Foreign exchange reserves stood at 676.2 billion dollars, and the corresponding import cover has fallen from a level above twelve months, which was once a source of legitimate satisfaction, to roughly ten. The current account deficit, by contrast, remains firmly in control, and the measures taken to attract external flows should show in the data as it arrives.

Internationally, the direction of travel is toward easing rather than tightening. Policy rates across the BRICS group have begun to come down, with movement already visible in Brazil and in Russia. The Federal Reserve appears likely to hold. Crude, having passed its peak, is expected to retreat, though the destination is genuinely unknown, whether toward seventy dollars or an average nearer eighty. That last uncertainty is more consequential for domestic policy than it first appears. The Reserve Bank's inflation projection of around 5.1 per cent was constructed on an oil assumption materially above where prices now sit. If crude settles in the range now contemplated, that projection will be revised downward, and the entire framing of where inflation stands relative to target will shift with it.

Which brings the argument to its uncomfortable conclusion. The prevailing view, expressed in survey after survey, is that extreme uncertainty counsels holding steady. That view is not wrong, and it is certainly safe. If the inflation projection is likely to be revised down, then holding the nominal rate constant amounts to allowing the real rate to rise passively, at exactly the moment when growth needs support rather than restraint. Growth estimates for the past year, 6.6, 7.1, 7.6 per cent, an unusually wide dispersion, leave the economy well short of the trajectory that a developed India by 2047 would require, commonly put at around nine per cent. The gap will not close on its own.

A reduction of twenty-five basis points would not constitute a dash for growth. It would constitute the creation of space, taken at a moment when the domestic picture is sound, the agricultural risk is contained by adequate buffers, the global rate cycle is turning, and the oil assumption underlying the inflation forecast looks conservative. The band is two to six. It would be worth remembering that before the next opportunity to act is allowed to pass.

India's flexible inflation targeting framework specifies a tolerance band of two to six per cent. Over the better part of a decade, policy discourse has quietly collapsed that band into its midpoint. The consequence is visible whenever a monthly print crosses four: a reading of 4.38 per cent is received as a transgression, when it sits comfortably inside the range the framework actually prescribes. A framework that is treated as a point target has, in effect, been made more restrictive than the one that was adopted, and it has been made so by convention rather than by decision.

Guest Panelists – Specialists from Market & Members from ASSOCHAM

1. Shri Subhash C. Aggarwal, Sr. Member, ASSOCHAM and Chairman and Managing Director, SMC Group

The Fed meets on 29 July and is not expected to increase the rate, with roughly two-thirds of opinion there in favour of keeping it stable. Domestically, the Reuters poll finds 68 of 72 respondents expecting no change, with only four looking for a 25 basis point increase, so the consensus is to hold at 5.25 per cent. The Governor has said that an increase would be premature, and is balancing growth against inflation and currency pressure, with growth not to be compromised. June marked the first reading above 4 per cent since January 2025.

The rupee reached almost 97 to the dollar in the recent past and is still around 96. The RBI has taken a series of steps, the FCNR deposits among them, and an inflow of some 32 billion dollars has been achieved so far, so that although the impact is not dramatic, the currency is at least not sliding as it was. Depreciating heavily does the country no good, and stabilising the currency alongside inflation is part of the RBI's task, on which it is doing a good job.

The markets tell the sharper story. Foreign portfolio investors have sold ₹3,40,000 crore of equity since 1 January, which is itself a source of pressure on the rupee, against ₹4,60,000 crore purchased by domestic institutions. The Indian market has not advanced since September 2024, when the Nifty stood above 26,000; today it is above 24,000. Over the same period the United States market and the Asian markets — Singapore, Korea, Taiwan, China — have risen substantially. The reason is that the importance of artificial intelligence, semiconductors and chips was not recognised in time and has been realised only recently, leaving India behind in these sectors. That the Indian market is sliding in spite of sound fundamentals is itself very important in deciding monetary policy.

Growth is being maintained, with GDP expanding at around 7 per cent, though the RBI has reduced its forecast to 6.6 per cent against 7.7 per cent last year. The position, accordingly, is that the repo rate should be stable and should not increase — various economists have suggested no increase until the end of the year — and that the stance should remain neutral.

2. Shri Arjun G Nagarajan, Chief Economist & Communications Manager, Sundaram Asset Management Company Ltd.

• Expecting an RBI pause as data doesn't suggest any untoward price pressures.

• Language to focus more on liquidity and levels it is likely to maintain.

• Expect RBI to remain cautious and watch the impact of monsoon on inflation and not let its guard down.

• Therefore will maintain its neutral policy stance for now.

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

Looking at flows from banks as well as non-banks, the substitution between them is clearly visible. The RBI has begun giving colour on the sectoral credit portfolio of non-banks on a monthly basis, with data available to May. On both a twelve-month and a two-month view, banks now lead by a very wide margin, with the bulk of recent incremental credit coming from them. Non-banks have barely grown, and within that category it is the foreign sources — external commercial borrowings — that have contributed most, with domestic NBFCs not proving much help in credit flow to the commercial sector. The argument that the RBI should support the commercial sector through easier credit conditions therefore does not hold much ground: given the uncertainties at play, the commercial sector has in a sense been getting more than it would have asked for.

The funding side is where the story turns. The credit-deposit ratio would ordinarily be comfortable in the first quarter, with deposit mobilisation exceeding credit, but this time the incremental ratio has run above 110. On a full-year basis, ₹32 lakh crore of incremental credit has come from banks against deposit mobilisation of about ₹29.5 lakh crore, leaving an incremental gap of ₹2.5 lakh crore. That gap has been funded by not parking additional SLR securities: on ₹30 lakh crore of incremental NDTL, investments of ₹6 lakh crore would be required assuming a 20 per cent requirement, whereas the actual is just about ₹4 lakh crore, so roughly ₹2 lakh crore of liquidity has gone to fund credit rather than investment. That is, in effect, a shift of demand away from government securities, and it is one reason why G-secs have not responded favourably — the composition of holding has changed. Data from the Department of Economic Affairs on holdings across investor classes shows banks' share of the outstanding G-sec stock falling from 36 per cent in the previous March to close to 33 per cent this March. This has to be kept in mind in thinking about where the rate trajectory helps the broader economy, because the government is itself one of the important engines, and its funding merits the same scrutiny as the commercial sector's.

On inflation the position is comfortable, with an internal working figure of close to 5.1 per cent as the full-year average. Crude has averaged close to 80 over the last couple of months, where at the previous meeting it was being factored above 90 and inching toward 100. The worst of the conflict is probably behind, though no number can be put on it, and India has managed the transition really well — availability was never in question, and cost only briefly so. If crude remains closer to 85, the macro should not come under much strain. On growth, the first-quarter data across all high-frequency indicators, not merely bank credit, paints a much healthier picture than would have been believed a couple of months ago, with growth possibly closer to 7. The RBI will not be losing sleep on that count.

The currency has been somewhat unnerving, and one reason may be the size of the forward book, with data to May showing more than $105 billion of forward positions maturing across three to twelve months. The incremental funds being mobilised on the forex side are unlikely to be deployed against downside pressure on the currency and will simply add to the existing book, so the currency may not benefit greatly even if $60 to $70 billion is mobilised under the FCNR scheme.

For NBFCs the terms are different again: banks are offering much cheaper terms to borrowers today, while the bond market has not been kind, with even AAA paper at 7.5 per cent, so borrowing at that level to compete with banks makes little sense. On the rate, the position is pretty much status quo, and the stance would also remain neutral. The RBI will not be in a hurry to revise its growth and inflation numbers, which are already building in the downsides, and should hold with them for a couple of months while the monsoon plays out and the conflict continues.

4. Shri Rakesh Rattan Aggarwal, Secretary, Derabassi Industries Association

This is the perspective of industry rather than of economics, the feel and the pinch that industry receives through the monetary policies of the Reserve Bank, which the economists on the panel have to understand if it is to be translated into policy. Taking up the point that funds are available but may not be affordable: they are definitely not affordable, and that is very clearly indicated. For many years the contribution of industry to GDP has been almost stagnant, and that barrier can only be broken by recalibrating the availability of funds to industry, and especially to the MSME sector.

Three data points frame the case. The NPA of MSME stands at about ₹1.8 lakh crore against total credit offtake of ₹31 to 32 lakh crore, roughly 6 per cent, and that 6 per cent of bad debt is ultimately loaded onto the interest rate the industry pays. The rate at which funds are available to MSMEs averages 8.5 to 10 per cent depending on rating, against a cost of funds in China of around 4.2 per cent, which indicates that some form of subsidy to lower the cost of production is being delivered there through monetary management, bypassing WTO regulations. And the average automobile loan is priced at about 7 per cent against about 8.5 per cent for machinery. Lending to an automobile creates and pulls demand, and demand not matched by ample production increases imports, which pressures the rupee to depreciate and slows industry's contribution to GDP further. That anomaly has to go. Since the maximum contribution of production comes from MSME, there is a good case for preferential pricing, ranking after the existing preferential sectors of agriculture and education. Moving to the pull of the production side controls inflation, availability, prices, imports and affordability together.

On the guarantee mechanism, CGTMSE is perceived as a false kind of situation. What is wanted is not a guarantee of the credit but insurance of it, an environment in which MSME credits are insured, funded by contribution from the borrower, by the Government of India or the state governments, and by the reduction in the banks' own cost of funds that would follow. With three agencies contributing, the cost could reduce by about 1 per cent, since the risk perception of the bank and the risk perception attaching to public money would both fall. That would make long-term sense for the safety and affordability of funds to industry.

The third proposal concerns external commercial borrowings. There is a threshold to access ECB that most micro and small units cannot cross, even though a good 1.5 to 2 per cent of cost advantage is presently available through that route — a differential that stood at about 4 per cent five years ago when the international benchmark was 1 to 2 per cent. The submission to the RBI, through the policy, is that the availability be recalibrated so that every bank creates an ECB window specifically for small industries, allowing industry to choose between a domestic loan and the ECB route. The cost of funds to industry would then be exposed to the international cost of funds, and industry would benefit.

Preferential funding to agriculture and to education is well said. Preferential funding to the automobile sector rather than to industry is not understandable, and needs to be recalibrated, re-discussed and rejudged against the cost of funds in China, which is the next-door competitor India actually competes with. Affordability is the major issue; availability of funds is not an issue at this moment.