India's Monetary Policy Is Being Set in Three Markets, Not One

The Indian economy has become more integrated with global capital, trade and financial markets. This is directly impacting the market dynamics in India. Monetary policy is no exception. India’s monetary policy is no longer the subject of one market, but is being shaped in three markets. In reality, it never was. The money market, foreign exchange market and bond market have been shaping India’s monetary policy simultaneously.

The Money Market

Liquidity is the real policy variable. RBI's operating framework is designed in such a way that it keeps the weighted average call rate (WACR) close to the policy repo rate to avoid any liquidity mismatch. This looks good in the textbooks, but the reality is almost always different. When bank system has surplus liquidity, the repo rate alone does not tell the full story. In early September, banking-system surplus liquidity rose to about ₹11.6 lakh crore. The RBI first responded with Variable Rate Reverse Repo (VRRR) operations and then moved to outright bond sales. The message is clear. Liquidity itself has become one of the monetary policy variables.

 

 

This is not new at all. Rather, it is old economics but with new numbers. Money is never neutral in the short run. Too much of it leads to asset bubbles. Too little brings stagnation. India is now in the middle of this dilemma. Despite the RBI absorbing over ₹8 lakh crore through multiple VRRR auctions, there remains about ₹7 lakh crore of surplus liquidity. This surplus money has to be managed in such a way that it improves operations in the money market and monetary policy transmission. Basically, liquidity is a policy variable now.

The Foreign Exchange Market

The second market that directly affects monetary policy is the foreign exchange market. The special USD-INR swap facility, including $127.23 billion through FCNR(B) deposits, has mobilised $136.38 billion by August 31. These inflows have strengthened India's external position, and forex reserves have increased to about $781 billion. But these inflows through the USD-INR swap facility and FCNR (B) deposits also create rupee liquidity. The RBI received these dollars and released rupees into the banking system, overloading banking system liquidity. Here foreign exchange management enters the domain of monetary policy. Here is the irony. A weaker rupee leads to increased import costs, including oil and other inputs, resulting in worsening inflation and the trade balance. On the other hand, surplus liquidity normally softens the short-term market rates.

 

 

 

The impossible trinity, as suggested by the Mundell-Fleming model, is a real situation. The RBI is dealing with that impossible trinity, where it needs to choose between capital mobility, exchange rate stability and monetary autonomy. India has chosen capital mobility and exchange rate stability through capital inflows under the USD-INR swap facility and FCNR (B), and by defending the rupee against the US dollar. The RBI has now constrained monetary autonomy.

The Government Bond Market

The third market is the government bond market, which is subject to monetary policy. The RBI is selling government bonds worth ₹1 lakh crore in Open Market Operations (OMO) sales. The response to the first tranche of OMO sales of ₹50,000 crore on September 17 was overwhelming, with bids of ₹66,590 crore. This response by financial institutions itself tells the story of surplus liquidity in the banking system. Government securities are not another asset class on the balance sheets of banks. Rather, these government securities are the indicator of confidence and benchmark price of rupee money for the wider economy. However, OMO sales are tricky too. Through OMO sales, excess liquidity is easily absorbed, but yields also rise, impacting monetary policy transmission. The 10-year government bond yield is part of the monetary transmission story.

 
The OMO sales announcement has forced the 10-year bond yield to hit 7 per cent after three months. This will affect long-term investment decisions and the cost of capital for the government while affecting the entire yield curve. Interest rates should respond to inflation and output gaps, but exchange rates and capital inflows do have a role to play in the monetary policy transmission story. The WACR is the operating target, and OMOs and FX swaps can be used to manage durable liquidity.

The Integrated Framework: One Policy, Three Dimensions

RBI cannot treat the repo rate, the rupee and the bond yield separately. They are on the same plate and have to be dealt with together, and this is the biggest monetary policy question RBI is facing. India needs a more integrated operating framework in which capital mobility (liquidity) management, foreign exchange management and bond-market conditions are assessed together. This is necessary to keep financial conditions stable enough to protect growth, while preventing external shocks from becoming domestic inflation or financial instability. This is going to become a regular situation as India grows economically and becomes more integrated with global markets.

The trilemma is real in an open economy like India. India has chosen its position. Now India’s macroeconomic management should ensure that the surplus liquidity from forex inflows is drained without spiking bond yields, while the exchange rate remains stable without sacrificing monetary policy autonomy and credibility. Growth must be protected while keeping inflation within the threshold.

The future policy challenge for India is to successfully manage these markets together without allowing one instrument to undermine another. This is not today's inflation number or forex reserves but the next decades.

The Way Forward: Policy Coordination and Credible Communication

India is in a spiral of high food inflation. WPI in August was around 10%, and it will reflect in CPI numbers in September. It is now a tricky situation for India's aspirations. The possibility of the RBI raising policy rates in the October MPC is very high. The difference between policy rates and inflation has narrowed enough to breach the RBI’s threshold limit in the inflation numbers for September. Even a few-point rise in inflation will make real interest negative. So pressure on the RBI to increase interest rates is very high to avoid a situation of negative divergence between interest rates and inflation. At present, the Indian economy requires a low interest rate regime to sustain its growth and allowing inflation to eat that growth would prove costly for the economy.

 

At this hour, India needs to do a few things. First, the RBI must ensure that monetary policy does not chase food inflation. This job should be left to the government to use fiscal policy instruments to manage food inflation rather than to tame it. Food inflation simply cannot be tamed through interest rates. Second, India must prepare a plan for the coming decades rather than for a quarter or year. High food inflation in India is a structural problem, as it has become a regular phenomenon at intervals. This doesn’t need a tactical but a structural response.

 

 

Third, the RBI should integrate the three markets into one policy framework and publish a quarterly financial conditions index integrating liquidity, exchange rates and bond yields. This will shift the central bank’s vision from one dimension to three dimensions. Fourth, the RBI must coordinate with the government on forex management. The swap facility and FCNR (B) deposits succeeded beyond imagination but created domestic liquidity problems. The RBI must plan for the consequences before they happen, as this will now become a regular occurrence at intervals.

India's financial integration is a strength. But the monetary policy must now integrate the three dimensions along with the fiscal policy. In such times, when fiscal policy focuses on growth and demands low interest rates and monetary policy is forced to increase interest rates to stabilise prices, the chances for stand-off between fiscal policy and monetary policy increase. History is replete with such incidents. Here lies the national interest.

 

Rajeev Upadhyay

Why Zero MDR on RuPay Debit Cards?

Merchant Discount Rate (MDR) is the fee paid by merchants for accepting digital payments. This has been there in India since Visa and MasterCard entered India. Different payment networks charge at different rates across payment instruments. Credit cards generally charge higher MDR than that of debit cards. MDR on Visa and Mastercard credit cards range from 1.5% to 2.5%, while American Express credit cards charge from 2% to 3.5%. Indian payment network RuPay-issued credit cards charge zero MDR on transactions valued up to ₹2000, and for transactions above ₹2000 the charges range from 0% to 2% depending on the transaction type and value. Debit cards have relatively lower rates, with Visa and Mastercard typically between 0.4% and 0.9%. RuPay debit transactions have 0% MDR.

For UPI, there is an MDR of 0.4% on P2M transactions above ₹2000 to be paid by merchants, which is capped at ₹300. P2M transactions up to ₹2000 have zero MDR. For P2P transactions, MDR is zero. Other special provisions apply to small merchants, essential services, and capital-market transactions. Overall, the structure shows how MDR varies by payment method, transaction type and regulatory framework, with the objective of balancing digital-payment adoption, merchant costs and financial inclusion.

India's First 'A' Rating: Can Monetary Policy Sustain It?

Japanese credit rating agency Japan Credit Rating (JCR) has upgraded India’s sovereign rating from BBB+ to A-. India’s entry into the A-rated sovereign club is not just a technical upgrade or symbolic, but a verdict on India’s policy evolution over two decades, the country’s growth, fiscal management and policy credibility. But the real test of that credibility is not coming from credit rating agencies but from how India responds to the persistent inflation shock in the economy. There looms a critical question now: Can India and the RBI’s monetary policy sustain this momentum? Or will it become the very factor that undermines our newly won credibility?
The Rating Upgrade Decoded

JCR has upgraded India's sovereign credit rating to 'A-' from 'BBB+', with a stable outlook. It is a historic moment for India as it took about two decades to upgrade from BBB+ to A-. With this, India has formally entered the ‘A’ band. Solid economic growth, effective and deliverable economic policies and an improved financial system are the key drivers of this rating upgrade.

Numbers have played the most important role in this upgrade. In FY26, GDP grew at 7.7%. Q1 GDP growth has been 7.8%, which is the fastest among emerging economies, and FY27 is expected to remain above the RBI’s estimate of 6.7% growth, supported by reduced personal income tax and GST rate reduction. The government is working on bringing the debt-to-GDP ratio down from 56.1% to 50% in FY27. The fiscal deficit is projected to be 4.3% to 4.5% during the period. However, on the negative side, the current account deficit has widened to $4.2 billion from $3.4 billion in the quarter ending June 2026, which is 0.5% of GDP. But at the same time, on account of RBI’s FCNR(B) success, India’s foreign exchange reserves have increased to more than $780 billion. 

It’s not the Right Time for MDR on UPI

MDR on UPI has become a household topic, polarising India. Some claim MDR is beneficial, while others express dissatisfaction. Many are asking how long UPI will remain free. Charges are natural. Others are asking when other freebies will be stopped. Every side has some fair points. MDR on UPI, like any decision, does have some benefits for the economy. But on the other side, it will also negatively affect people and the economy.

MDR on UPI does have some positive impacts on the economy. It will make the UPI ecosystem sustainable and competitive in the medium to long term. The annual cost of operating, scaling and maintaining UPI infrastructure is about INR 20,000 crores. Not only this, the business was not profitable for operators, so the businesses were not investing much in cybersecurity, innovation and system upgrades. MDR on UPI will make the business competitive, and more investment will flow into cybersecurity, innovation and system upgrades. This will also help in improving UPI infrastructure in rural areas. So on these counts, the MDR on UPI is beneficial.

It should be noted that UPI cannot be treated as a freebie. Rather, it is an economic enabler which is helping in creating an ecosystem that revolves around the digital economy. This costly free economy is a 'positive discrimination' which is helping increase financial inclusion and formalise the economy. Once, on 15th October, this MDR on UPI becomes a reality, it will have many negative consequences for the economy. It will lead to increased use of cash, indirect inflation and a pushback for growth-stage small retailers.

WPI and CPI Becomes Sticky in India

Inflation in India is becoming sticky. In August 2026, CPI inflation rose to 4.82%, while food inflation climbed to 5.95%. WPI inflation neared double digits at 9.92%, showing that price pressures are no longer limited to consumers and are spreading through production chains, which will eventually be passed on to consumers. Though CPI remains within the RBI's inflation threshold, inflation's headstrong turn suggests it may soon breach the limit, and the RBI may opt to raise interest rates.

This is not merely a monetary problem. India’s food supply remains vulnerable to monsoons, weak storage, fragmented markets, external shocks due to fuel dependency and, most importantly, speculation. The RBI cannot solve these structural constraints by raising interest rates or by using monetary policy instruments.

The solution to this structural problem lies in the hands of the government. The government must invest in logistics, irrigation and competitive agricultural markets (agriculture reforms), along with bringing down the dependency on imports to plug the problem of imported inflation and shocks.

India's Trade with BRICS Nations

BRICS is now just a forum for talk, but it is a structural reality for India. And India doesn’t sit at its centre by accident but by design. The number of member countries has increased from 5 in 2006 to 11, plus 10 partner countries. BRICS now commands nearly 40% of global GDP, 26% of global trade, and about half of the planet's population. So this bloc is not a simple multilateral forum but has the economic gravity of a very big continent. However, India runs a trade deficit of more than $200 billion with the BRICS nations, while India’s trade with the USA and Europe is more favourable. The USA is the largest trade partner of India, with which India has a huge trade surplus. So, a section of India is asking about the relevance of India’s membership in BRICS and the benefits that India drive from the exercise over two decades. While many already have prejudices, many fear the dominating presence of China in the group. These questions and prejudices are not uncalled for. The stark trade data and China's moves makes these questions relevant. 

Q1 GDP Growth: Not the Numbers but Methodology

The first estimate of Q1 FY 2027 real GDP growth is 7.8%. It's not just a number; it's a fact and a statement. A statement that India’s growth engine, contrary to the gloom peddled by certain quarters, remains robust, resilient, and fundamentally sound. But in polarised India, this data has become a new battleground. Everything relating to GDP growth is now revolving around narratives rather than economics. We're having intense discussions, but we haven't yet addressed the economics and the process through which GDP estimates are calculated. It must be noted that the GDP estimate in India is revised five times over a period of three years. And the GDP numbers released by the Indian Government are the first estimate. That means it will be revised again and again to ensure that there remain the least possible errors and duplicities.

The controversy was sparked by former Finance Secretary Subhash Chandra Garg’s claim that growth was merely 2.6%, which rests on a statistical fallacy so elementary that it does not need any debunking! To arrive at his growth numbers, he compared nominal GDP figures from two incompatible series: the old 2011-12 base year and the new 2022-23 base year. It must be noted that the Ministry of Statistics and Programme Implementation (MoSPI) has made it very clear from day one: the Q1 FY26 nominal GDP was revised from ₹86.05 lakh crore under the old series to ₹80 lakh crore under the new series. So mathematically, the 10.3% nominal and 7.8% real growth stand unchallenged.

India's Economy: Mixed Signals

The Indian economy stands at a stage in its economic cycle where it is uncertain about its future trajectory. One survey indicates an uptick in private sector activity, while another points to a slowdown in industrial output growth. RBI data reveals that India's total foreign exchange reserves have hit an all-time high of $730 billion, with FCNR(B) deposits exceeding $65 billion. Yet, another survey suggests that GDP growth is decelerating, alongside rising inflation.

The Indian economy is sending mixed signals. Due to its reliance on external sources to meet its needs, the economy is becoming trapped in a spiral where the path forward is unclear. In this scenario, uncertainty will persist until government economic policies and increased investments by major business houses align in the same direction. However, there is another aspect to consider: private capital seeks both growth and security simultaneously. Ultimately, the direction lies in the government's hands.

NCLT Approves a Haircut of 99.97% for Subhash Chandra

NCLT has shown the green flag to the repayment plan submitted by Essel Group Chairman Subhash Chandra. However, people are questioning and interpreting this decision as politically nuanced. But is it really true?

It is easier to sensationalise by accusing NCLT and the Government of India of an approximate 100% haircut in this personal Bankruptcy case against Zee Group Chairman Subhash Chandra initiated by Indiabulls. But the fact is very simple. Let’s understand the case first.

Zee Group Chairman became a party to bankruptcy proceedings for being a guarantor of debt transactions with financial institutions in Essel Group insolvency proceedings. It should be noted that he didn’t borrow that money in a personal capacity. Rather, money was borrowed by the group. He is a guarantor. He is there in the case just because he is a guarantor who is eventually the Chairman of the group.

Government to Abolish Bank Guarantee Requirement for MSMEs

Abolishing the bank guarantee requirement would be one of the best forms of support the Government of India could offer to MSMEs. Most of these units operate with limited capital, making it difficult for them to even arrange working capital for day-to-day operations. Financial system unintentionally and indirectly has negative bias against small units!

This proposal would open up new business opportunities for MSMEs. The government should not only increase MSME participation in its operations but also introduce schemes like the PLI (Production Linked Incentive) for them. Implementing such measures would reduce the volume of low-value goods imported from China. This would create business and employment opportunities within India while also helping to bring the trade deficit with China under control helping balance of payments position and Indian rupee. A low trade deficit will result into strong rupee and lower imported inflationary shocks.

Surging Sugar Prices and Ethanol Blending

The government's decision to blend ethanol with petrol will prove economically beneficial for the country in the long run; however, the 40–50% surge in sugar prices over the past month is baffling to the common person.

There was already significant public resentment regarding ethanol blending, though it had not yet manifested as widespread discontent. While ethanol was a topic of discussion in the streets, it had not yet become a subject of conversation within households. Now, however, due to the rising cost of sugar, both ethanol and sugar have become talking points in homes. Women are raising questions. When women begin to express dissatisfaction and repeatedly question society or policies of the government, that discontent tends to become widespread.

Growth in 1st Quarter to remain 7.3%

Despite all headwinds, the Indian economy is expected to grow at 7.3% in the first quarter of the financial year 2026-27 ending on June 30.

Manufacturing, mining, construction & financial services, real estate & professional services would be the major growth pillars in this growth. Agriculture, public administration and trade, hotels, transport, communication & services related to Broadcasting Services will drag the growth momentum.

Among all the problems, rising inflation in the economy is the biggest challenge for the Indian economy. Inflation since March has remained elevated. Not only this, but due to a weak monsoon, crop production is expected to remain weak. Speculation relating to sugar post-ethanol blending in petrol is already a problem.

The economy is expected to grow at 7% this fiscal year. An annual growth of 7% is the new normal for the economy. Its opportune time for India when it can jump its growth rate into double digits.

Rajeev Upadhyay

Uttar Pradesh has to Build an Eonomic Ecosystem to Attract FDI

If you look at FDI received by Indian states, you would be surprised to see the distribution pattern. Uttar Pradesh contributes around 9% to India's GDP. However, it receives less than 2% of the total FDI that India receives! Maharashtra contributes about 14% to India's GDP, but it receives about 35% of total FDI!

Why?

Because, over time, Maharashtra worked on the economic environment. When India was thinking about building one-lane highways-cum-connecting roads, Maharashtra was building 4-lane highways. While states in northern India were busy promoting political fault lines and building narratives around them, Maharashtra was busy establishing manufacturing plants. They built an ecosystem. That's why almost every big politician in Maharashtra has some business interests, and unlike other states, none in Maharashtra has a problem with it. Rather, they appreciate it! They don't like unemployed politicians!

Cities on the Rise: Changing Employment Landscape in India

LinkedIn's new 'Cities on the Rise' list gives very interesting input about how the job market is changing as far as cities are concerned. Big metro cities like Bengaluru and Mumbai were the prime locations but are losing to smaller cities like Visakhapatnam, Prayagraj, Ludhiana, Surat, and Vadodara.

India's metros are choking on their own success, and the job market is finally responding to that reality. Bengaluru's and Mumbai's rents and traffic, Delhi's polluted air aren't quality-of-life footnotes anymore. They're becoming economic costs, and companies are pricing them in.

According to the basic spatial equilibrium theory workers and firms stay in expensive cities only as long as the wage premium covers the extra cost of living there. Once traffic, real estate and pollution such other factors start eating into that premium, the equilibrium breaks and people leave. This is becoming a reality in India. Visakhapatnam, Ludhiana, Surat, Ranchi, Prayagraj, and Vadodara are becoming the center of attraction for both employers as well as the employees. These cities aren't winning because they suddenly became more attractive. They're winning because metro cities like Bengaluru, Mumbai, and Delhi have stopped being worth the trade-off.

Chandra Shekhar and Balance of Payment Crisis of 1991

The season of winter was starting when on an arbitrary day, sweets were brought to our home for no apparent reason. At that age, nothing else was important but sweets. Simply getting as many as possible was the goal. So, I happily focused on the sweets. That very night, overhearing a conversation between my father and my two uncles, I learned that a man named Shri Chandra Shekhar who was from my birthplace, Ballia, had become the Prime Minister of India. I learnt that he was also the Member of Parliament for Ballia. From their talk, I gathered only that the Prime Minister was the highest-ranking official. When I asked, my grandfather explained in simple words that the Prime Minister was the country's king! Those were the days when my mother or grandmother would tell us bedtime stories about kings and queens every night. At the time, I actually imagined that Chandra Shekhar had killed the king and seized the throne! That was my first real political awakening outside the realm of fairy tales! Later, after the Babri Masjid demolition and the dismissal of the Kalyan Singh government, I learned that Chandra Shekhar had become Prime Minister by a margin of vote; not by killing anyone! Back then, I was a student at Saraswati Shishu Mandir in Ratsar and the environment was very tense. I remember going door-to-door with friends, chanting the "Ayodhya Chalo" slogan and scribbling it on walls in exchange for lemon candies.

Government Must Reconsider Fee on UPI Transactions

The NPCI has revolutionised the Indian payment gateway landscape by popularising UPI and the RuPay network. NPCI has effectively ended the duopoly of American giants Visa and Mastercard in the payment gateway business in India. Today, a significant portion of transactions is processed via the Indian RuPay network, and it's a remarkable achievement. About 65% of total 700 million debit cards and 18% of credit cards of total 119 million are issued by Rupay. About 40% of total credit card transactions volume and 8% of value is processed by the Rupay network.

This shift has been financed by the Government of India, as the government has been bearing the costs and facing international pressure to curb this subsidy. This has obviously created a market with distortions which heavily depend on government subsidies. In the long term, such a market cannot sustain itself. So it is logical for the government to make UPI self-sufficient, but timing doesn’t seem to be opportune. India is going through a difficult phase post the volatile situation in the Middle East and tariff risks from the US. Economic activities are expected to cool down in the coming months. In this situation, any fall in domestic consumption and GST collection would be costly for the economy.

Widening Trade Deficit with Russia

For years, India had been maintaining the largest trade deficit with China, followed by the Middle East. But the geopolitical shifts in 2022 changed everything. Russia was not even in the top 10 countries with which India had a trade deficit. But since 2022, India has witnessed a historic and asymmetric expansion of its trade deficit with Russia, making Russia one of its most important trading partners. Before 2022, India’s trade deficit with Russia was under $5 billion, but it has now skyrocketed to a staggering $50.9 billion.

India’s rising trade deficit with Russia is widening despite the rupee-ruble payment mechanisms between the two countries with the purpose of broadening the bilateral trade relationship. But the rupee-ruble payment mechanism is not working. The reasons behind this are India’s massive trade deficit with Russia, volatile exchange rate and inconvertibility of the rupee, as well as fear of sanctions from the US. These make the rupee-ruble payment mechanisms almost ineffective, and often the two countries opt for alternate currencies like UAE Dirham (AED) for bilateral trade.

West Asia Conflict is Slowing Down Indian Economy

Indian economy is showing resilience and is expected to grow at 6.7%, but the ride is expected to be bumpy. It is caught in a problem for which it has no solution on its own. It is completely dependent on other parties.

The conflict in West Asia between the US and Iran has proved a double-edged sword for India. It is hurting India from two sides. India is facing energy challenges in terms of limited access to energy sources as well as high prices on one hand, which is turning the mathematics against the Indian economy as it induces inflation in the economy and increases current account deficit and rupee volatility. This is hurting demand in the economy. On the other hand, India's $50 billion in exports to the Middle East have almost come to a halt. This is pausing economic activities in India. Firms exporting to the Middle East are forced to pile up inventories as these firms are unable to ship their final products to their buyers despite long-term contracts. Their export consignments are caught and hanging in the balance in the firing zone between the US and Iran. This is resulting in slow manufacturing activities and lower labour demand. This has started the vicious circle.

New Tariffs by Trump in the Name of Forced Labour

A person consumed by spiteful rivalry often goes to great lengths to cause trouble for their rival, even if it means suffering a loss themselves. US President Donald Trump’s behaviour mirrors this mindset; in his zeal to 'fix' other nations, he repeatedly deals blows to the American economy.

India will certainly be adversely affected by the new tariff, as will other nations. However, it is ultimately the American citizens who are paying the price for Trump's love for tariffs. By the way, President Trump has populaized tariffs in a such a that now it does feel like an economic term even for a layman!

One wonders: is this merely the US President's spiteful rivalry at play, or is he, knowingly or unknowingly, becoming a Trojan horse for America in general and the American economy in particular?

Numbers don't Always Draw the Real Picture

Core sector output climbed to a five-month high of 5% in June. That's up from 3.2% in May and 1.1 percentage points higher than a year ago. Also, GDP growth is expected to be around 6.7% in the first quarter. But one may wonder whether everything is good on the economic front?

On the construction and public-works story, cement and electricity output each rose 9.8%, and iron ore, just added to the index, jumped a staggering 43.9%. But one must remember that the activities in these sectors don’t represent broad-based industrial revival. During the same period, crude oil output fell 4.2% in June, and natural gas production dropped 7.4%. The energy sector is under huge pressure. Activities in the energy sector actually tell you whether real economic activities such as manufacturing, transport, and consumption are picking up or not.