Key Takeaways

1. The global situation is extremely uncertain regarding the direction of oil prices.
2. Global economy can take 2-3 years to recover from damage caused by the conflict in Middle East.
3. Currency stabilization is important for trade and investment.
4. The Rapid depreciation of Indian Rupee needs to be addressed.
5. The Current Account Deficit needs to be carefully managed.
6. Instrument like FCNR- NRI bonds can be considered, as in 2013.
7. Climate including Monsoon can be more inflationary.
8. To correct the CD ratio banks are raising rates for deposits.
9. In view of globally driven shocks, monetary policy requires careful calibration.
10. Avoid abrupt monetary tightening despite concerns for higher inflation.

Recommendations of EGROW Shadow MPC

Members of EGROW – 5
Repo Rate – No Change
Stance – Neutral

Guests – 4
Repo Rate – No Change
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.

Under inflation targeting there can be changes in the pass through of cost shocks. Moreover, the oil intensity of production is lower. Past experience, therefore, is not a good predictor of future inflation.

If this is an inflation spike there is no need to raise repo rates. Inflation has been over-predicted for the past 2 years. Even the April headline CPI inflation, at 3.5%, surprised at below expectations. Therefore, we need to wait for more data. The cost-increase will hit most firms and they will have a pricing decision in July-August. Research shows firm pass through of cost shock has halved in the inflation targeting period. They are conscious of consumer price sensitivity and at present focusing on improving cost efficiency. So better to wait. The monsoon picture will also be clearer in a couple of months.

Starting from low inflation also gives the space to wait. The Hormuz issue is turning out to be persistent but oil futures are still varying at 70-90 below 100. If high oil prices last for 6 months the growth and inflation cost is likely to be 1% each.

Taking an inflation forecast of 4.5 the real repo rate is 0.75. But the equilibrium real rate falls with a negative shock to consumption of the poor. Firms are also stressed and would benefit from lower real rates. Their borrowing costs are going up. In the current environment a range of 0.5—1.5 is appropriate. The RBI needs to revise down its range of 1.4-1.9%.

My view is for a pause and a continuation of the neutral stance.

There is concern about the rupee sinking and some push for an interest rate defense, but raising short rates has not worked in the past and tightening liquidity will hurt NBFCs. Long market rates are already high and do not need to be raised more. Reserves are adequate for daily RBI buy-sell transactions that would calm panic hedging demand, without the tight control of 2023. Relaxation of norms for capital flows, in line with reforms, can be expedited, without ad-hoc expensive one-time schemes.

We have had a capital account surplus in 29 out of 35 post-liberalization years resulting in substantial buffers. Inflows will return as global risk-off ebbs and reserves can be rebuilt again. Real depreciation has reached past crisis levels and has always reversed from those.

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

Hold the repo rate, but argument is that the decisive battle is over the rupee and the reserves — and that India must issue NRI bonds to restore credibility.

The base call is a hold on the repo rate. The optimal real rate lies between 0.5 and 1.5 per cent — roughly 1 per cent is neutral, and in troubled times it can fall to 0.5. But the policy rate is not where the real action lies.

The genuine crisis is the rupee and the reserves, and the rupee has been flashing red for five years. Holding the US dollar constant, it has depreciated by 4 to 5 per cent a year since 2021 — against a long-run historical pace nearer 2.5 per cent — with a 10 per cent fall now on year-on-year. Tellingly, the rupee had already crossed 90 before the Iran war; the conflict worsens matters but did not cause them.

Beyond oil, a new pressure has emerged: electronics imports, which are swelling the import bill. On the inflow side, capital is chasing artificial intelligence. Korea’s KOSPI has doubled and Taiwan has surged, while India’s Sensex has slipped. This is not a problem that will pass in a hurry.

The reserve picture, too, is less comfortable than the headline suggests. At roughly $670 billion the number looks reassuring, but net of forwards and gold revaluation it is probably closer to $550 billion — and the market reacts to this $550 billion, not to the headline. Worse, intervention can be self-defeating: the more the RBI sells, the weaker it looks. Having sold around $25 billion forward and $7 billion spot in March, and about $10 billion spot across April and May.

In our view, the RBI must now demonstrate that it can attract inflows rather than simply bleed reserves. The prescription is direct. India needs immediate “bullet” money, and there is no real alternative to NRI bonds, which could raise at least $50 billion in our view. The global rate environment makes this feasible: unlike past episodes of 1998 and 2000 when US rates were far higher, today’s lower Fed rates leave ample room. Even with the domestic time deposit rates serving as a natural cap, money can be raised at around 6 per cent with a FX guarantee or subsidized swap rate. The perennial anxiety over the swap rate is overdone; across all three previous issuances there was barely any depreciation over the life of the bond.

The value of such a move lies as much in the signal as in the sum. Raising $50 billion would show the market that the authorities recognize the problem and are acting on it. The market will watch what the RBI says, and far more, what it does. Timing matters greatly. I made the case for NRI bonds was in 2012, when the rupee was in the 50s; the issuance came only at 65+ — acting earlier would have helped.

Depreciation, moreover, leaves lasting scars. I was told by one of the world’s largest hedge funds in London, that its investment committee would not return to Indian paper easily as they were hit by the rupee depreciation in 2013. barring the exposure. The one who is singed takes a long time to come back; credibility, once demonstrated — as with the FCNR(B) deposits that drew some $33 billion — returns only slowly.

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

The MPC should pause on both the rate and the stance, while the real challenge — a capital-account-led balance-of-payments strain — is tackled on a more fundamental footing.

A note of caution is warranted on the real effective exchange rate. For India, the large weight of food and other non-tradables in the CPI means the measure is not, on its own, suggestive of a true outcome. It is a long-term concept, and even over the medium term the level at which it normalizes may not be adequate, given that non-tradable share. That qualification deserves weight in the discussion.

In normal times, market forces should prevail and the rupee should move as it will — and nobody disputes that. But this is a crisis situation, and in a crisis, allowing the rupee to go haywire only lengthens the return to normalcy; some management of the pace is therefore warranted.

The external problem is not, at root, a current account problem — the deficit is running around 2 per cent, give or take. It is that this will be the third consecutive year of a balance-of-payments deficit, driven by a shortfall of capital flows rather than by the current account. The remedy is more fundamental, and medium-term: something must be done to attract capital. Several levers sit with the government — enabling more external commercial borrowings, drawing in more banking capital, and perhaps some rationalization of taxation for foreign portfolio investors, though whether that last is the ideal route remains uncertain. In the immediate term, if the balance of payments is not managed well, the result could be a vicious cycle for the rupee in which flows dry up regardless, making the roughly $100 billion current account deficit ever harder to finance — precisely the worry preoccupying market participants.

The supply shock will not lift quickly. Even if the war ended and peace negotiations began at once, the supply-side disruptions would persist for long, keeping current-account and input-price pressures elevated. Corporate clients already report cost-price increases of 50 to 65 per cent across the board, with stress surfacing in different pockets. Corporates entered this period with robust balance sheets and can absorb the pressure for a time, but beyond a few months that pricing power fades, and the costs will be passed on to consumers in due course. If the pace of rupee depreciation can be contained, imported inflation can in turn be better managed.

On inflation itself, there is a reassuring side. The MPC’s mandate runs up to 6 per cent, and despite everything, average inflation is not expected to breach it: the adverse-case estimate is 5.7 per cent, and the base case is an average of 5 per cent — resting on the hope that crude stays below $100. On fuel specifically, with crude up to about $100 a barrel, and given the excise duty cut and the increase already taken in pump prices, energy analysts suggest no further incremental price rises may be needed, as refiners are broadly breaking even. Up to $100 the position holds; beyond it, fuel-price pressure returns — a development worth monitoring.

Growth has not yet taken a visible hit; the available cushions have absorbed it so far. But it will show through more clearly over time, both in the growth numbers and as pass-through into core inflation — WPI already signals the higher input prices, and it is only a matter of time before they reach CPI core. The eventual picture is one of slower growth alongside higher inflation.

The recommendation follows. The MPC should pause now, on both the stance and the rate, because these are purely supply-led risks — oil and geopolitics — and the prudent course is to wait and assess the extent of the second- and third-order effects on growth and inflation before taking a call. For the next two policies a rate hike is not warranted; from October onwards, the possibility of hikes opens up. For now, the mode should be wait and watch.

Finally, on credit and deposits: the pressure to raise deposits is real, and it helps explain why deposit rates remain elevated. Although the Governor has indicated that the RBI is not targeting a specific credit-deposit ratio, and that a slightly elevated number is acceptable, past guidance has left a residual fear in the banking system; internal audits continue to check that the ratio is held at or below certain levels, and that pressure keeps deposit rates high.

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

No change in rate or stance, warning that conflicting pressures cannot be addressed by the interest-rate weapon alone — and that defending the rupee will take more than NRI bonds.

The position on this policy is clear: no change in the interest rate, and no change in the stance. The economic parameters are moving in conflicting directions, and it is very difficult to address such variables with the policy rate alone. Overall macro-management — on both growth and inflation — will demand a range of initiatives beyond monetary policy, rather than relying solely on the interest-rate weapon to address everything.

On deposits and credit, one structural point matters. Although the RBI has guided that the credit-deposit ratio is not a statutory requirement, banks watch it very carefully, and that mindset will not change quickly. More tellingly, over the last six months — measured on an incremental basis across a one-year window — the system has entered a phase in which the credit-deposit ratio has consistently run above 100 per cent. The “excess fat” that cushioned earlier years is no longer there, so there will be persistent pressure on banks to mobilize deposits. Smaller banks may hold an advantage as they expand into newer geographies and launch fresh initiatives in a growth phase, but the challenge confronts the banking system as a whole.

A recent study points to an intriguing shift. Where money had been flowing out of bank deposits into market-driven instruments, there now appears to be some flow back into retail deposits. The geography is revealing: the western metros, led by Mumbai, account for roughly 22 to 23 per cent of total bank deposits, and their deposit growth — once in the high teens, occasionally touching 20 per cent over the past two to two-and-a-half years — has fallen to around 8 to 9 per cent. Meanwhile, rural and smaller centers have begun to pick up.

The mechanism is instructive. A saver in a village near Chennai or Madurai who invested in a mutual fund would, in effect, see that money — once a deposit in a local bank — reclassified as a deposit held by a large mutual fund in Mumbai. As mutual-fund AUM growth decelerates, that money is flowing back to retail areas. For the first time in the post-COVID period, suburban and rural deposit growth has surpassed metro and urban growth — something never previously seen since COVID. The lesson for banks is to compete harder for retail deposits with better products and services; even so, deposit-gathering will remain difficult for every bank.

On the rupee — the big elephant in the room — the problem clearly sits on the capital account. The 2013 experience with FCNR and NRI bonds, which helped considerably, is fresh in memory, but two cautions apply this time. First, 2013 enjoyed relatively greater global stability: India, then one of the “Fragile Five,” was the specific locus of concern, and the flow of money in response was comparatively assured. Today the global backdrop is itself shifting, and between announcing such a measure and actually mobilizing the funds, the outcome is far less certain.

Second, the September 2013 bond did not stand alone. It coincided with a major structural reform — the adoption of inflation targeting — and much of the confidence that followed flowed from that pairing. The question, therefore, is whether something of comparably fundamental character can accompany any new bond issuance, rather than relying on the bond alone. That is a task for the broader set of policymakers, not the RBI in isolation.

As for the rupee’s direction, there is a measure of control at present, but much depends on the external situation. The key is less whether oil falls back to $80 tomorrow than whether the fear of oil moving significantly higher begins to subside; if it does, the outlook for India and the rupee could improve at the margin. Yet no single lever can dramatically change the rupee’s direction right now — and despite generally better macro fundamentals and significantly stronger corporate balance sheets, India is, on the currency front, somewhat more vulnerable at this moment than in some previous years.

5. Dr. Charan Singh, Chief Executive EGROW foundation.

Uncertainty, not weakness, is the defining feature of the moment — and that it calls for a steady hand.

The current monetary policy announcement needs utmost attention as the global economy is passing through massive uncertainty.

The international backdrop offers little comfort. World growth is stunted even as inflation turns northbound, a combination that should concern every policymaker. The IMF's own projections suggest inflation will remain elevated through 2026 and ease only by 2027 — hardly a passing disturbance to be ridden out in a single quarter.

At home, the picture is genuinely mixed. Several core industries — coal, crude oil, natural gas, refinery products and fertilizers — are pointing downward, with only steel, cement and electricity offering a positive impulse. The demand side reads better: a sharp rise in capital goods imports, stronger two- and three-wheeler production, and improved April readings for manufacturing and export orders. Yet every one of these figures pertains to April, and in an environment shifting this fast, last month's snapshot is already dated. It would be unwise to mistake it for the present.

The sharpest concern lies in prices, and within prices, in food. The RBI's analysis shows inflation rising across six divisions; edible oils, flagged at the highest levels of government, are climbing, as are other commodities, with an intense summer compounding the pressure.

The agricultural cycle is the deepest worry. Given the severity of the heat, even the first-round effects are uncertain, let alone the second and third. Should the conflict abroad persist, those later rounds could prove far larger — and even an immediate ceasefire would leave damage to output in oil- and gas-producing nations that may take one to five years to repair.

The external account demands equal vigilance. The rupee is under real depreciation pressure, and while theory holds that a weaker currency aids exports, the present context warrants caution. Interest-rate differentials move both the exchange rate and capital flows, and with the United States, the United Kingdom and the euro area all holding their rates steady — unlike Brazil and Russia — India's room for divergence is narrow. A rupee at 100 to the dollar is no longer unrealistic, and may well arrive before FY27; the greater worry is that the direction is moving faster than anticipated.

Commodities deepen the unease. If tensions ease, long-term oil could fall below $100, perhaps below $80 — but the timing is unknowable, and the damage done before that relief arrives is not. Crude has already swung from roughly $59 to nearly $95 a barrel amid the Iran–US escalation, far beyond the modest shifts our models assume. Gold, too, adds to the disquiet, its domestic price amplified by every movement in the rupee, with projections pointing to elevated levels through this year and next.

None of this, however, reflects a weak economy. Credit growth is outpacing deposits, the earlier easing is still transmitting through lending and deposit rates, and although foreign exchange reserves have dipped, India remains comfortable, with healthy import cover and some 90 per cent of debt repayments covered. The memory of 2013 — when a current account deficit driven by gold shook the rupee until decisive correction restored confidence — should inform us, not alarm us. Instruments such as FCNR deposits remain available, but they are tools for a genuine crisis, not a panic button to be pressed while reserves still afford a critical cushion.

Hence, there is no need for raising the policy rate at the present juncture, given intense uncertainty.

Guest Panelists – Specialists from Market & Members from ASSOCHAM

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

From the vantage of industry and the markets, that businesses need lower rates — even as external pressures may compel the central bank to stay its hand.

Monetary policy matters deeply to businessmen and industry, who await each announcement keenly and for many reasons. After the last repo rate of 5.25 per cent and a neutral stance, the working expectation is that both should continue — though industry would dearly welcome relief. The pressures bearing down on that decision are considerable, and they begin abroad.

The rupee is depreciating and Indian equity markets are sliding, even as the US Federal Reserve has paused and American markets climb. Much of this traces to India’s dependence on oil: with the Strait of Hormuz under the shadow of closure, oil prices are rising, raw materials and other inputs have grown costly, and the current account deficit is expected to widen to around 2.1 to 2.2 per cent. These are not pressures the central bank can simply wish away.

Growth must be read against this backdrop. Although earlier estimates placed GDP growth at six to seven per cent, that figure has to be weighed against inflation, global volatility and the rising price of oil. Headline CPI inflation is reasonable, but core inflation is sticky — leaving the RBI the genuinely difficult task of balancing growth against inflation. It is a hard job, and this particular meeting is therefore important, giving banks and industry the clarity they need on the direction of rates.

The markets tell a sobering story. Foreign investors are selling heavily and continuously. The Indian market, which once commanded a premium, is now trading at a discount, while the US market enjoys a premium on the strength of its lead in artificial intelligence and semiconductors. India lags in these new-age sectors — it has yet to build out its semiconductor capacity — and, for the moment, lacks an immediate trigger to lift equities.

There is, however, a clear lever within the government’s reach. To attract foreign portfolio investment and steady the currency, the capital gains tax should be reduced — ideally to zero. Doing so would help stem the outflow of portfolio capital and stabilize the rupee, and it is urgently required.

The conclusion carries an honest tension. Industry needs lower interest rates, and a cut would be genuinely welcome, even if it will be challenging to deliver. The expectation, therefore, is twofold: while the RBI ought to reduce the rate for industry’s sake, its compulsions — a depreciating currency, costly oil, sticky core inflation and persistent capital outflows — are likely to keep the repo rate unchanged at 5.25 per cent, with the neutral stance intact.

2. Mr. P. R. Seshadri, Chairman ASSOCHAM National Council for Banking and MD & CEO, South Indian Bank

Stress across nearly every industry and urges to have policy preserve flexibility for businesses.

These are the observations of a banking professional rather than a trained economist — the trend lines visible to a bank, rather than the formal apparatus of the economist. And what a bank sees, first and foremost, is a general tightening of liquidity.

The sharpest impact has fallen first on highly rated borrowers. AAA corporates, including quasi-sovereign names, are now raising short-duration money some 40 to 50 basis points higher than before. Curiously, the retail side has not felt the squeeze as quickly — a problem of distribution, since pricing mechanisms take longer to flow through to distributed entities. Abroad, US long rates have eased off their peaks: the 30-year now trades near 5 per cent, down from about 5.2 per cent a couple of weeks earlier, and the ten-year sits just short of 4.5 per cent, while the rupee has retreated to around ₹95 to the dollar from a peak of 97.

The feedback from clients — largely medium and larger enterprises — is stark. Hardly any industry is untouched by the present crisis, for the simple reason that petroleum is a raw material or input for most of them. Businesses dealing in petrochemical products report that total business is down by roughly half while the cost of what they sell is up 70 to 80 per cent; they are content with the profits made on stock held at historical cost, but deeply worried about what lies ahead. Even sectors such as textiles report significant cost pressure, alongside a general slowdown in the payment cycle, with the velocity of receipts falling considerably.

The disruption reaches the factory floor. One air-conditioner manufacturer had halted production altogether, unable to access propane — itself a petrochemical product. This is anecdotal, gathered by engaging customers across sectors rather than from any statistical base, but the pattern is consistent and sobering. If the first-order impact of such a shock is hard to estimate, the second- and third-order effects are almost impossible to gauge — which makes the task of the Reserve Bank, under these circumstances, genuinely difficult.

One banking-specific wrinkle deserves attention. Although most loans are linked to an external benchmark, with the repo rate among them, there is in practice little correlation between the repo and a bank’s actual cost of money. The irony is plain: after the last repo cut, the rates offered to domestic depositors actually rose. Assets are repricing downward even as banks pay more for deposits — a squeeze that speaks directly to the stress in the system and its hunger to attract larger volumes of deposits. SIB, smaller than the largest players, grew deposits by about 15 per cent and CASA by roughly 17.5 per cent last year and sees no slowdown; the strain is felt more acutely by institutions with far larger balance sheets.

On the rate decision itself, the call is left to those with formal training. But the parting message is unambiguous: this is a period of significant stress whose full impact will be felt over time, and whatever is decided must give the system reasonable flexibility — enough to allow businesses to continue succeeding, and to keep building a robust framework in which the economy can do reasonably well going forward.

3. Shri Arjun G Nagarajan, Chief Economist & Communication Manager, Sundaram Asset Management company Ltd.

RBI stand point, it is wait and watch; unless we see a positive surprise on the currency front; which is what we probably need. But expect around 25-50bps of rate hikes in the Dec'26 quarter.

India is resilient, given where the world is currently. With US midterms in November, worst case is that crude prices would start its moderation from Sep/Oct this year. And this, with a lag however, would be positive for India and EMs given how energy is a large chunk of its imports. If the currency eventually stabilizes, FIIs are most likely to start coming back in the Q3 and Q4 quarters.

On currency, concerns are purely on flow mismatches which are higher than before. An interest rate defense must not be attempted at all, for the reason that it didn't work and also because it shows desperation on India's part. We do not need that at the moment. However, I think the Rupee needs urgent addressal similar to how it was dealt with in 2013 and 2022, a mix of these measures perhaps. If such a large intervention does not come through, it is only fair to expect continued rupee depreciation. Now, while financial markets might not like this, from a long-term point of view if flows stabilize, it could on the fringe, help exports. And on valuations, from a 5Y standpoint, the rupee looks attractive, but would still need some certainty to set on the currency narrative from the RBI, if the strategy was to let the Rupee slide. On tax cuts for debt or equity, one should probably avoid as it shows a weak hand and on debt, with currency weakness still in play, hedging costs would mor than outweigh whatever little yield spreads one could make.

Now on inflation, given how the CPI is relatively shielded, even a 10% rise in petrol/diesel prices, will have a relatively lesser impact than what a bad monsoon would. A deficient monsoon is likely to take up our inflation higher and briefly breach 6%. Even a below normal monsoon at peak, is just shy of a 6%.
So, from an RBI stand point, it is wait and watch; unless we see a positive surprise on the currency front; which is what we probably need.

4. Shri Sujit Kumar, Chief Economist National Bank for Financing Infrastructure & Development (NaBID)

Rate should not move now, but argument is that the real challenge is industry’s resource flows and the balance of payments — and should be addressed as a BoP package rather than an interest-rate defense of the rupee.

With much of the ground already covered, One addition concerns the flow of resources — and the worry that industry is, in a sense, being sidelined when it comes to credit flow. From a tenure perspective, industry’s choices to raise resources have learned more on external commercial borrowings than on credit from commercial banks. To fund expansion, every kind of resource is needed, domestic or foreign alike.
The trouble is that the domestic cost of credit has seen little downward movement. The fundamental reason is that high borrowing at the general-government level has kept the risk-free cost of capital itself from any meaningful downward revision across tenures. And in a low-inflation, low-nominal-GDP, low-revenue environment, there is little incentive for corporates to borrow. This is where the policy needle needs to move a little.

On the rate itself, the view concurs with every other participant: there is no wisdom in moving right now. The market has already priced in roughly 50 to 75 basis points of cuts by the end of the financial year; the question is only whether to sequence them now or once conditions are more comfortable. For the moment, speculation — on the currency and on rates alike — is running the show, more than fundamentals. When the war will end, where crude will settle, and how long India will defend the rupee are anybody’s guess, and these combinations are weighing on sentiment.

On the currency, there is no rational explanation at present. The basic arithmetic is straightforward: flows on the financial account are needed to fund the balance on the current account, and anything beyond that builds the reserve cushion. India’s cushion is, in fact, far stronger than during the 2013–14 episode when the rupee came under attack — adding up all capital-account flows today leaves the position much higher than then. Even at a current account deficit of around 4 per cent in that earlier period, capital flows of roughly 4 per cent of GDP were sufficient to fund it.

What needs rethinking, therefore, is confidence in India as a destination for capital. The policy of attracting long-term flows deserves to be revisited, as do the exit options currently available to foreign capital. This is not a vote against India, but the scale of outward FDI at this moment warrants honest re-examination.

The conclusion follows: this policy is better approached as a balance-of-payments package than as an interest-rate response to defend a particular level of the currency.