Recording of the Event

Key Takeaways

1. Growth has to be priority.
2. 8 Core Industries have recorded a decline during April-December 2024. Similar trend in IIP, April-November 2024
3. Inflation is mainly due to vegetables. Inflationary pressure, net of prices of Tomato, Onion and Potato, is around 4 percent.
4. Thankfully, the RBI has recently eased liquidity in the market. Hopefully, on a durable basis, this easy liquidity would be maintained.
5. Uncertainties, mainly global, and especially emanating from the US, are a cause of great concern.
6. Foreign exchange reserves continue a depleting trend.
7. Exchange rate continues to depreciate.
8. Financial markets, credit trends, and NPAs are in robust condition.

Recommendations of EGROW Shadow MPC

Members of EGROW — 6
Repo Rate
Pause – 2
Decrease – 4

Guests — 4
Repo Rate
Pause – 2
Decrease – 2

Detailed Views by Members of the EGROW Shadow MPC

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

Some salient changes in the last two months are inflation falling within the tolerance band and towards the target. Market expectation for January is 4.6% and 4% for the year, so current as well as forward looking real repo rate is above 2%. Such a real rate contributed to the current growth and investment slowdown, as it did in the 2010s also. These episodes point to the interest sensitivity of Indian aggregate demand, which research also supports. Corporate results largely reflected the slowdown. Real interest rates have been high for more than a year now. Their persistence is dangerous since monetary policy acts with a lag.

Fiscal consolidation has exceeded expectations, growth assumptions are also conservative. There is an emphasis on agriculture as the first growth engine with action proposed on vegetable supply chains. All this should provide comfort to the MPC.

There is an argument that since the budget provides stimulus the MPC need not do so but with consolidation the net demand from the government is falling. A real policy rate of around unity is essential for sustained recovery.

It is also argued that liquidity is more important than rates and must come before rates can be cut. But the RBI’s recent liquidity injection despite FPI exit, shows they have the tools if the intent is there. In a neutral stance, they are free to inject as required.

The main concern behind calls for a status quo seems to be fear of global volatility. But it is important to smooth external shocks do not aggravate them by squeezing domestic demand as well. The post pandemic period showed we have the degrees of freedom to set interest rates to suit our domestic cycle. Moreover, the FIT MOU has no mention of exchange rates. The policy rate cannot be used for an interest rate defence. In any case it does not work in Indian conditions where growth attracts FPI more than low growth and high interest rates.

Despite worry about low deposit growth, banks with good credit growth have made good profits. Growth recovery, strong loan demand and better ability to repay, which requires low real interest rates, will benefit financial institutions.

In view of these arguments, I think a 25 bps cut is required.

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

We are looking at a 25bp RBI rate cut but the room is limited by the Fed pause.

Inflation has never been a concern, barring transitory rain/supply shocks.

Growth faces headwinds from high real lending rates, fiscal contraction, a possible poor rabi wheat crop, due to inadequate waters and a global slowdown.

At the same time, the large-scale sale of FX reserves will make the INR more vulnerable in case of a RBI rate cut when the Fed has shifted to a pause and the USD is strengthening.

We have long expected the RBI to cut 100bp by end-2025 premised on Fed cuts. With the Fed on hold, this can get pushed out.

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

A rate cut alone will not be effective unless liquidity conditions improve. Liquidity has worsened significantly, prompting the RBI to implement additional easing measures in the past week. However, core durable liquidity remains in deficit, and despite these interventions, it will continue to stay negative. At the very least, durable liquidity—comprising RBI-parked funds, government cash balances, and net banking system liquidity—should be neutral or slightly positive.

The new central nodal agency system and just-in-time (JIT) government spending are structurally altering liquidity availability for banks, requiring time for the system to adjust to this new normal. Systemic liquidity concerns are evident, as overnight rates were extremely high before recent interventions. More liquidity support will be necessary, though the initial steps taken are positive. While I previously advocated for a hold on rate cuts due to global uncertainty and rupee stability, the rupee has now adjusted in line with market movements, mitigating concerns of external shocks.

Inflation is settling around 4-4.5%, and growth remains weaker than expected. The government has recognized this, implementing stimulus measures, but monetary policy must also contribute. Given these conditions, RBI should cut rates by 25 bps immediately in February, followed by another 25 bps cut later this year, totalling 50 bps for 2025. This will help stabilize GDP at around 6.5% and mitigate downside risks.

Banking liquidity constraints must also be addressed. With elevated credit-deposit ratios, the Liquidity Coverage Ratio (LCR) adjustment for mobile/internet-enabled retail deposits will need to be gradual. If executed too quickly, it could worsen banking liquidity conditions, keeping deposit rates high and limiting monetary transmission. Even with a rate cut, incremental loan pricing may not drop significantly, as borrowing costs are not declining proportionally. A staggered approach to LCR implementation and liquidity management is crucial to ensure monetary easing is effective.

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

I expect the RBI to continue supporting liquidity, with a possible need to enhance those measures further. However, I do not foresee any changes to the Cash Reserve Ratio (CRR), as it was recently adjusted and currently stands at around 4%. Given the latest budget announcements, there is a growing expectation for a rate cut in February, making it a very close call. Notably, two MPC members have already voted for a rate cut in previous meetings, meaning just one more vote could tilt the balance.

Despite the case for monetary easing, we should avoid a rate cut at this stage, as the current environment is too volatile. Instead, it would be more effective to wait for stability and implement a larger rate cut in April. No amount of liquidity support seems sufficient at this moment, and RBI should have taken stronger liquidity measures even before Q4FY24. The inflation-targeting framework has led to a prolonged period of low reserve money growth (6% vs. a long-term trend of 12-15%), contributing to the current tight liquidity conditions.

With uncertainty in FII and capital flows, a staggered rate cut now versus a larger cut in April may not significantly impact new investments or projects. Given this, it is best for RBI to focus on ensuring adequate liquidity rather than rushing into a rate cut at this juncture.

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

I believe there was an opportunity to cut rates 2-3 months ago. However, today’s situation presents a different challenge—one that does not require counter-cyclical support but rather demands managing short-term instability. The current crisis, driven by tariffs, geopolitical uncertainties, and market withdrawals, is temporary and is likely to settle in the next few months.

While rate cuts are necessary going forward, we must carefully consider financial stability and rupee movement. I acknowledge the benefits of a rate cut but given the uncertainty and the transition in the U.S. government, it is prudent to follow a more measured approach, ensuring stability before easing rates. Instead, RBI should stay neutral while providing adequate liquidity to support growth.

Growth recovery will naturally contribute to stability, but since the current instability is temporary, keeping rates unchanged is the best course of action. While counter-cyclical stabilization is important, cutting rates during a volatile period might tip the balance negatively, given the fragile sentiment in the market. Therefore, I recommend holding the repo rate steady for now and reassessing once global and domestic uncertainties subside.

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

Growth has to be the priority. If we examine the eight core industries for which the data has been released last week. For April to December 2024, the performance is weaker than the corresponding period of the previous year. Similar trend has been noted in IIP.

On the prices front, the situation has to be carefully evaluated. The prices of Tomato, Onion and Potato have been rising very wildly, causing the inflation figures to rise very rapidly. In the economic survey, a series has been presented nett of the prices of Tomato, Onion and Potato. Both, headline as well as food prices are in the range of 4%, if nett of these three vegetable commodities. Hence, inflation is in the range.

The economy in general is doing good. Flow of credit to the market is also reasonably well. The Non-Performing Assets are low, and this is the time when given that the economy is doing well, the RBI can consider rate cuts.

The Union Budget has mentioned that market borrowings next year would be about 3.2% of GDP, while in the current year they are about 3.3% of GDP. The interest payment in the next year is estimated at 3.6% of GDP, higher than the current year. The total Revenue Expenditure of the Government is in the range of 11.1%. This implies that interest payments will be nearly 1/3 rd of the total Revenue, that is very high.

The RBI in recent weeks has infused liquidity into the system. CRR is already down. The Budget also has provisions to infuse and stimulate consumption. In the midst of the U.S. pause, the RBI could raise the rate of interest now for consolidation. This will help in prioritising growth in the economy which has been disappointing in the last quarter especially.

In most countries of the world, the interest rate has been lowered in recent months. In some cases, inflation has not come down to the stipulated target level, but despite that, to spur growth, interest rate has been lower.

Hence, my recommendation would be to reduce the Repo rate by 25 basis points at the least, and if possible, by 50 basis points. This will help catch up with the reduction in the interest rates in the U.S. The fear of capital flow would not really exist as the money in India is attracted because of its long-term growth potential.

Guest Panellists – Specialists from Market and Members from ASSOCHAM:

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

My personal view is that RBI should not cut interest rate of 25 BPS in the proposed Monetary Policy Meeting to be declared on 7th February, 2025. Why?

1. The Fed Reserve has not cut any interest rate in their latest meeting.
2. Rupee has depreciated to a great extent.
3. Real Interest rate is lesser in comparison to US 10 Year bond yield which is elevated at 4.58%.
4. Inflation is still on a higher side in India. In December it was 5.22%, and we are expecting in January 4.5%, so it is higher than the RBI comfort rate of 4%.

Though RBI has reduced 50 bps CRR in December in the MPC meeting and recently taken additional measures to provide liquidity in the system.

Though many economists favour rate cuts considering global uncertainty, weak growth, expectations of declining inflation, and fiscal prudence in the budget, they expect inflation to remain at 4% in 2025-26. Therefore, while both views exist, my personal opinion is against a rate cut on February 7th and suggests it be considered in the April 2025 MPC meeting instead.

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

I continue to expect a start only in FY26. My core reason is in particular to focus on the external sector.

India is not seeing a slowdown, independent of a sharp slowdown we witnessed over these quarters from the government on spending (esp. capex).

And we have seen this clearly reflecting in both lower operating profits of listed companies and also this feeding into lower manufacturing GDP and headline as well.

For now, I think the need to stay the course is even more important given the sharp FII outflows from equities that I think can start from debt as well soon enough. Markets expected bond inclusion to bring about $25bn in the first 10 months and we have seen only just about $8bn into FAR so far. Most importantly, a fully hedged investment into India 10Y yields give FIIs well under what US 10Y yields are currently. And after quite a while, this spread is negative.

In addition to these risks that loom, one must note that almost all of the additional domestic liquidity deficit was linked to the RBI's FX intervention. Since November, the RBI appears to be continuing its intervention in double digits. Therefore, I continue to feel a pause would be more appropriate. Also given this would be Mr.Malhotra's maiden monetary policy, the need of the hour is more continuity in the narrative, and not pander to the market expectations of rate cuts.

What I think would be more likely, would be another two sets of 600bn of OMO purchases, given the FX interventions underway, what has been delivered would probably not be enough.

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

I firmly believe that now is the right time for a repo rate cut, as major global and domestic events — including U.S. policies, the Federal Reserve’s actions, and the Union Budget — are shaping monetary policy. Liquidity has already improved, with a 50 bps CRR cut under the previous governor and other measures supporting credit availability.

With fiscal policy now actively driving growth, the government has focused on consumption-led expansion, including lower tax slabs to boost demand, manufacturing, and job creation. Food inflation has significantly declined from double digits and is expected to fall further, easing overall price pressures.

We now have room for a 25 bps rate cut, especially since the U.S. Fed has reduced rates twice while we remained on pause. Lowering rates would directly benefit MSMEs, as turnover and investment caps have been revised, allowing more businesses to access affordable credit. A rate cut would help microfinance institutes like us to make loan instalments more affordable, easing financial strain on small businesses and fuelling broader economic growth.

4. Shri Sujit Kumar, Chief Economist, NABFID

Growth must now take priority—we have waited too long focusing solely on inflation control. With January inflation expected to fall below 5% and RBI’s liquidity infusion of INR 1.5 trillion, conditions are favourable for a repo rate cut.

While external uncertainties exist, RBI has tools to manage them separately, and monetary policy should align with fiscal efforts to boost capital expenditure (capex) and propel growth. Rate cuts should proceed without being overly influenced by global factors.

From NABFID’s perspective, funding is primarily through the bond market, where G-Sec yields reflect demand-supply dynamics. Lending conditions remain favourable, particularly as risk weightage for infrastructure projects is decreasing, with minimal defaults in the sector. A rate cut would further support infrastructure financing and economic expansion.