Beyond Repo Rates, Reimagining India’s Monetary Policy for Sustainable Growth

Beyond Repo Rates, Reimagining India’s Monetary Policy for Sustainable Growth

Why in News?

With growing signs of domestic demand fatigue and increasing global economic uncertainties, concerns are mounting over India’s economic momentum. This has rekindled the debate around the Reserve Bank of India’s (RBI) monetary policy framework and whether conventional tools like repo rate adjustments are enough. A recent article argues for a structural rethinking of India’s economic toolkit—similar to China’s approach of targeting specific sectors through long-term financial instruments.

Introduction

India’s monetary policy has long revolved around the manipulation of the repo rate and short-term liquidity adjustments as a way to guide economic performance. However, in the face of weakening domestic demand, tepid industrial credit growth, and rising global volatility, there is a growing need to re-evaluate the relevance of such traditional tools. This is especially important when India aims to become a developed economy by 2047, which would require sustained GDP growth of 7-8% annually.

The time has come to shift focus from inflation control to development-driven monetary policy. China’s model—targeting specific sectors using tools like long-term repo operations—offers a compelling example for India to consider.

Key Issues and Institutional Concerns

1. Overreliance on Repo Rates

The Reserve Bank of India (RBI) and its Monetary Policy Committee (MPC) have been praised for making timely rate adjustments in response to inflation and economic pressures. These interventions have helped manage inflation expectations but may be inadequate for addressing deeper, long-term economic concerns like uneven growth across sectors or sluggish investment in large industries.

The current repo-centric policy model sidelines structural instruments that could offer more targeted and sustained economic momentum. As India seeks to transition from a developing to a developed economy, relying solely on repo rate adjustments may no longer be sufficient.

2. India’s Growth Needs vs Current Trajectory

According to the World Bank’s 2025 Country Economic Memorandum, India must maintain 7-8% real GDP growth for the next two decades to become a high-income country by 2047. However, projections for FY25 indicate growth in the 6–6.5% range—a shortfall that could derail long-term goals.

Moreover, there are signs of a slowdown across key economic drivers:

• Domestic demand is weakening.

• Global uncertainty is clouding trade prospects.

• Private investment remains sluggish.

• Industrial output is patchy.

These headwinds necessitate interventions that go beyond just interest rate tweaks.

3. Sectoral Disparities

Growth trends reveal sectoral imbalances. While MSMEs (Micro, Small, and Medium Enterprises) and agriculture are expected to perform reasonably well, large-scale industries are faltering. The automobile sector and certain manufacturing segments show only modest growth, indicating deeper structural constraints.

This disparity is echoed in credit growth data, which shows that:

• Large industries registered just a 3% CAGR (Compound Annual Growth Rate) in bank credit over the last decade.

• MSMEs showed a higher 11.18% CAGR.

• Yet MSMEs still lag in overall credit volume compared to large corporates.

The implication is clear: despite their performance, MSMEs continue to face investment constraints, while larger companies are not absorbing credit as expected—signaling hesitancy in expansion and capital investment.

Bank Credit Growth: A Mixed Picture

The BusinessLine (July 15 edition) revealed that sectors like infrastructure, textiles, and metals—key pillars of industrial activity—have seen poor credit growth. These industries accounted for more than half of all industrial credit but saw less than 3% annual credit growth in the last decade.

Meanwhile:

• MSMEs and small industries saw 11.18% CAGR.

• Their limited access to capital-intensive projects remains a bottleneck.

• Growth in credit to large industries from ₹21.4 lakh crore to ₹27.3 lakh crore during 2015–2025 suggests a compound annual growth of just 3.9%.

The issue isn’t just credit availability—it’s also about credit uptake. The RBI Governor noted that large companies are increasingly using non-bank avenues like bonds and commercial papers, further reducing the effectiveness of traditional banking channels.

This points to a dual challenge:

• Underutilization of credit by large industries.

• Inadequate capital access for small and medium players.

Global Headwinds and Tariff Hikes

To compound India’s internal challenges, global headwinds—such as slowing exports and potential recession risks in Western economies—threaten to pull down India’s growth further. Although recent US tariff hikes may not severely impact Indian exports due to their limited volume (under $50 billion), the overall global slowdown will make it harder for India to grow through external demand alone.

Therefore, India must focus on internally driven, investment-led growth supported by structural financial policies.

China’s Model: A Blueprint for India?

China offers a compelling case study in structural monetary policy. The People’s Bank of China (PBoC) has used long-term, targeted financial tools to boost specific sectors and address economic heterogeneity. One of its key strategies includes:

• Pledged Supplementary Lending (PSL): Long-term funding to banks to support infrastructure and social development.

• Targeted Long-Term Repo Operations (TLTROs): Sector-specific liquidity provision.

These instruments aim not just to inject liquidity but to direct it toward sectors that need long-term support—whether infrastructure, green energy, or high-tech manufacturing.

India has tested similar mechanisms in the form of TLTROs during the pandemic, offering targeted repo funds to banks for investment in specific sectors. However, these tools remain underutilized.

It’s time for the RBI to:

• Institutionalize long-term, sectoral monetary tools.

• Promote lending to infrastructure and capital-intensive projects.

• Address MSME credit constraints with tailored financial instruments.

Challenges and the Way Forward

1. Institutional Hesitancy

The RBI’s cautious stance towards experimental instruments is understandable, but prolonged over-reliance on conventional tools risks stagnation. A more innovative and flexible central bank approach is needed to boost investment and productivity.

2. Sectoral Credit Architecture

Large firms need structured incentives to invest in new capacity. MSMEs need access to easier and cheaper credit, backed by credit guarantees and sector-specific funds.

3. Coordination with Fiscal Policy

Monetary policy alone cannot address structural gaps. It must work in tandem with fiscal measures—particularly:

• Public infrastructure investment.

• Sector-specific tax breaks.

• Government-backed project financing.

4. Building Resilience

With the global economy on shaky ground, India must prioritize domestic resilience. This includes:

• Encouraging private sector investment.

• Promoting job creation in high-multiplier sectors.

• Investing in green, digital, and manufacturing transitions.

Conclusion

India’s journey toward becoming a developed economy demands more than incremental repo rate changes. It calls for a bold and visionary shift in monetary policymaking—one that aligns with long-term developmental goals, targets sectoral imbalances, and harnesses India’s domestic potential.

By drawing lessons from China’s structural approach and customizing them to Indian conditions, the RBI can help chart a more resilient and inclusive growth trajectory. The future lies not just in tweaking interest rates but in reimagining the very tools we use to drive economic progress.

Q&A Section

Q1. Why is there a need to rethink India’s current monetary policy approach?

Answer: India’s current monetary policy largely depends on repo rate changes to manage inflation and stimulate demand. However, this approach does little to address long-term structural issues such as uneven sectoral growth, credit inequality, and investment hesitancy. With India aiming to become a developed economy by 2047, structural reforms in monetary policy are necessary.

Q2. What are the limitations of relying only on repo rates?

Answer: Repo rates influence short-term liquidity but fail to address deeper economic challenges. Sectors like infrastructure and large industries require long-term financing, which cannot be stimulated merely through lower interest rates. Moreover, repo rate cuts don’t always translate to increased investment or credit uptake.

Q3. How does China’s monetary policy differ from India’s?

Answer: China, through the People’s Bank of China, uses sector-specific instruments like Pledged Supplementary Lending and Targeted Long-Term Repo Operations to guide credit to critical areas like infrastructure and manufacturing. This structural approach has enabled China to sustain sectoral growth even during global slowdowns.

Q4. What does the bank credit data reveal about sectoral growth in India?

Answer: Bank credit to large industries has shown sluggish growth of just 3% annually over the last decade. In contrast, MSMEs have grown at over 11%, yet still struggle with access to capital for expansion. This shows a mismatch between credit supply and actual investment needs.

Q5. What steps should the RBI take to improve its monetary policy framework?

Answer: The RBI should:

• Institutionalize long-term sectoral instruments like TLTROs.

• Provide directed credit for infrastructure and MSMEs.

• Coordinate with fiscal policy for holistic development.

• Build a more flexible and adaptive monetary framework to ensure long-term, sustainable, and inclusive economic growth.