Since June 1, India’s 10-year benchmark bond yield has moved by barely 10 basis points, while the US yield has risen by about 70 basis points. This remarkable resilience is the dividend of India’s past fiscal and monetary discipline. We should not squander it. State-level freebies are eroding fiscal discipline, while near-zero real interest rates and accelerated money creation threaten monetary discipline. It is not too late to return to the policies that delivered this hard-won macroeconomic stability.

The main problem facing the rupee was persistent FPI outflows. Despite the extraordinary measures taken to contain the pressure, those outflows have resumed in September. By September 21, FPIs had withdrawn ₹17,235 crore from equities and ₹10,272 crore from debt. This reverses the equity inflows seen in July and August. In debt, the substantial June-July inflows turned into a small outflow in August and heavy selling in September. September’s debt outflow of ₹10,272 crore is already close to April’s 2026 high of ₹10,826 crore. At the present pace, September will exceed it. Low relative real interest rates reduce the attraction of Indian debt. Recent rate increases in the US, the euro area and Japan have further reduced India’s relative yield advantage. For equity investors, what matters is expected future growth, not merely high growth today. Much of India’s current growth comes from correcting past misallocation of resources and removing old bottlenecks. That is valuable, but it can take us only so far. We must be seen leading in sunrise sectors, competing successfully in high technology and winning internationally. One positive is net FDI. At approximately $7.8 billion during April-June 2026, it has already marginally exceeded the $7.7 billion recorded during all of FY2025-26. In the short run, we should consider capital-gains tax cuts to improve equity returns and higher interest rates to restore the attractiveness of rupee debt. In the long run, industrial policy must focus squarely on making India a global leader in high-technology and other sunrise sectors.

The final number of guaranteed foreign loans we have taken is much larger than previously reported 133 billion. India has raised $143.6 billion under RBI’s special foreign-exchange facility: $133.0 billion through FCNR(B) deposits and another $10.6 billion through overseas bank borrowings and ECBs. RBI has absorbed these dollars into its reserves, creating rupee liquidity while largely preventing the rupee from appreciating. Then why did we implement this policy? To increase forex reserves from 650 billion to 780 billion using money borrowed under guarantee? Why was a conventional rate increase of perhaps 50–75 basis points, as Indonesia used, not tried before assuming such enormous risks? This question deserves an answer. I think we will be forced hike rates anyway. The FCNR policy amounts to betting on geopolitical and financial stability when these liabilities mature in three to five years. If even half the money exits together during a global crisis, the pressure could be severe. Let us hope nobody starts a war over the next five years. This is our best case. rbi.org.in/scripts/BS_PressR…

The latest RBI data show that broad money (M3) has grown 16.7% to ₹332.2 trillion. Bank credit is growing even faster, at 19.1%. In comparison, nominal GDP grew 10.3% last quarter. After Covid, M3 and nominal GDP growth were broadly aligned. That relationship broke down in 2025-26 and the divergence continues this year. CRR cuts and the RBI’s large bond purchases have contributed to this monetary expansion. Rapid money growth is less worrying when credit is subdued. That is not the case now. Credit is expanding substantially faster than nominal GDP. For the moment, we are enjoying the attractive phase of this policy: high real growth without high inflation. But sustained monetary and credit expansion usually ends less pleasantly, with inflation, slower growth and, most dangerously, financial instability. It is not too late. The RBI should begin aligning money growth with nominal GDP growth. But delay will make the adjustment harder. Unfortunately, the FCNR policy risks adding further liquidity and worsening this divergence. rbi.org.in/Scripts/BS_ViewWs…

The bigger problem with MDR is the insistence by policymakers that merchants cannot pass it on. The case for MDR relies on market logic: payment services cost money and therefore require a price. But the policy then abandons that same logic when deciding who should bear the price. You cannot invoke markets to justify a charge and then reject markets when determining its incidence. Who ultimately pays depends on elasticities and competition, not an administrative instruction. Enforcing otherwise will require monitoring prices, discounts and payment choices. It could become another tool to harass merchants and extract rents. This is how Inspector Raj begins. That is what I fear most, even more than the charge itself.

This response by Gukesh will go down in history as a masterclass for humility. For those who don't follow chess, this is the first time in decades that a World Champion is not playing on Board 1 (strongest board) and instead playing on Board 4, because there are 3 other Indian players in better form. Many fans criticized the coach for disrespecting the world champion and look how he responds.

Good to see The Economist acknowledge how extraordinarily India has performed over the past decade. It finds that 3.3 billion people now live in countries where per-capita growth has fallen to less than half its rate during the previous decade, up from 1.1 billion in 2014. Germany’s growth in real income per person fell from 1.5% annually in 2004–14 to 0.6% in 2014–24. China’s rate halved, while Latin America was barely richer after a decade. Among the original BRIC economies, only India avoided the slowdown. The two decades were very different, so absolute growth rates are not directly comparable. Relative performance is more informative, and India clearly stands out. The Economist also finds that real income per person in the better-performing economies rose by 38% during 2014–24, with nearly half of that improvement coming from India. It is good to see this performance being recognised. While discussing the reasons, however, the article misses one important source of India’s success: financial stability, restored after a painful banking crisis. We must not endanger that hard-won stability through policies that flood the system with money or create large future foreign-currency liabilities. Growth is precious. Financial stability allows it to endure. economist.com/finance-and-ec…

The US will soon have a real interest rate above 1.5%. India will be near zero. Then we wonder why the rupee depreciates. I think we are already 9–12 months behind. If we wait until inflation feeds into expectations, wages, rents and contracts, it will be too late. History is clear: once inflation expectations become entrenched, controlling inflation becomes extremely difficult.

We are pleased to share that ISB’s Post Graduate Programme in Management (PGP) has been ranked #5 globally in LinkedIn’s Top MBA Programs 2026. We have retained our place among the world’s top five MBA programmes for the second consecutive year, reflecting the journeys our alumni continue to build long after their time at ISB. The ranking features 100 MBA programmes worldwide and is based on LinkedIn data measuring alumni career outcomes across five pillars: hiring and demand, ability to advance, network strength, leadership potential and gender diversity. For us, this recognition reflects the strength of our alumni network, spanning industries, leadership roles and geographies across the world. #ISB #LinkedInTopMBA #MBA2026

Spectacular trade numbers for August. Goods exports rose 26.1% over last year and services exports increased 24.6%. The overall trade deficit fell by $2.2 billion to $9.4 billion. We may record another current-account surplus this month. The weaker rupee is finally helping manufacturing exports take off. Merchandise exports have grown 17.9% during the first five months of this financial year. I hope the RBI does nothing to disrupt this progress merely to defend arbitrary round numbers. A 10% real depreciation of the rupee is good for exports, jobs and Atmanirbhar Bharat. pib.gov.in/PressReleaseDetai…

Effective industrial policy has a legitimate place for subsidising activities that generate exceptionally large positive spillovers for the wider economy. Unfortunately, we appear to use the term “industrial policy” without understanding what made successful versions work. A few years ago, we kept the rupee overvalued and weakened exports, even though export discipline was central to East Asia’s success. Now we are partly withdrawing support from UPI by introducing MDR charges. UPI is a world-class Indian innovation that lowers transaction costs, formalises commerce and creates benefits far beyond its direct users. Any coherent industrial policy would continue supporting an infrastructure with such an extraordinary benefit-to-cost ratio. This is not how successful industrial policy is run.

Reported consumer-price inflation has risen to 4.82%. This is inflation over the past year. Monetary policy must respond to expected inflation. At a repo rate of 5.25%, the forward-looking real rate is already likely negative and could fall further. Persistently negative real rates punish savers, as India painfully discovered between 2011 and 2014. This will eventually hurt private investments and we will all collectively wonder why private investment is not picking up in India. Investment comes from savings and not from money printing. We should also stop treating “core inflation” as an economic law. It is merely a proxy used to separate presumed supply shocks. Demand can raise food prices too. That matters when the ₹5–6 lakh crore of reserve money created last year has already supported a ₹40–50 lakh crore expansion in broader money. The supply-shock argument for food is compelling when the monsoon fails. Last year’s monsoon was normal. Fuel inflation also understates the shock because much of the increase has not been passed through. If we wait until reported inflation crosses 6%, we will have waited for a backward-looking number to confirm what monetary conditions already indicate. We may then tighten too late and, as usual, overdo it. A 50 basis point hike is overdue from last 9-12 months. Sadly, we appear determined not to learn from the past.pib.gov.in/PressReleaseDetai…

We have heard plenty of negative commentary about India’s growth over the past decade: manufacturing has grown too slowly, exports remain inadequate and job creation has disappointed. This commentary ignores an extraordinary achievement: India has grown rapidly while improving financial stability. India’s 10-year government-bond yield has fallen from about 8.9% in 2013 to around 7% today. Among comparable G20 countries, yields have increased everywhere except China, India and Indonesia. US yields have risen from 2.9% to 5%, Japanese yields from 0.7% to 3%, and German yields from 1.9% to 3.5%. China’s falling yield is hardly evidence of economic health. It partly reflects weak demand, deflationary pressures and slowing growth. Indonesia is the relevant positive comparison, but India has substantially outgrown it. India is therefore the only major G20 economy that has combined persistently high growth with a large decline in long-term sovereign borrowing costs. Bond markets are particularly informative about macroeconomic risk. Equity investors enjoy limited liability: their losses stop at the amount invested, while their potential gains can be enormous. They therefore attach considerable value to upside possibilities. Bondholders are the opposite. Their upside is capped at the promised interest and principal, while inflation, currency instability or fiscal stress can inflict substantial losses. They concentrate relentlessly on downside risk. India has not purchased growth by destroying macroeconomic credibility. Achieving high growth while reducing the risk perceived by long-term lenders is extremely rare. The government, the RBI and policymakers responsible for this record deserve substantial credit.

Prime Minister @narendramodi recently highlighted the impact of the #PMSVANidhi scheme and cited findings from a study on the scheme’s outcomes for street vendors. The study, led by ISB Professor @TantriPrasanna, examined the scheme’s impact across three key areas: post-pandemic relief, business growth, and the creation of credit histories and digital identities. It found that approximately 85% of vendors now use digital payment systems, up from around 40% in 2022. The Government of India extended PM SVANidhi until 2030 last year. The findings add to the evidence on how the scheme has expanded access to formal finance and digital payments for street vendors, offering insights relevant to policy and financial inclusion. Video credits: @CNBCTV18News

The next time governments and regulators are willing to take risks by offering guarantees, they should consider guaranteeing part of equity investment in innovative start-ups and small firms. The current approach is to guarantee debt. That does not work well for new and innovative firms whose investments are inherently risky and cannot support fixed repayments. There is certainly a possibility that taxpayers will lose money on some equity guarantees. But the total loss should be far smaller than the bill imposed by the NRI subsidy scheme. Unlike the NRI subsidy scheme, however, this risk carries substantial upside for the country. It can stimulate innovation, investment and job creation while helping India address its persistent “missing middle” problem.

Finally, RBI will permanently absorb at least ₹1 lakh crore by selling government bonds. This will raise government borrowing costs. In economic substance, it also connects about $10.5 billion of government financing to foreign savings. This is still better than leaving the excess money with banks to create trouble later, but no accounting label can conceal what has happened. The sequence is simple: Banks raised $136 billion abroad, creating foreign-currency liabilities for which RBI effectively guaranteed the exit exchange rate. Banks gave those dollars to RBI and received rupees. Banks now hold more rupees than they can profitably deploy. RBI will therefore sell government bonds to banks and take back ₹1 lakh crore. Before this operation, RBI held these government bonds and banks owed money to foreign depositors. After it, banks hold the government bonds while retaining the foreign liabilities. Thus, part of the banks’ foreign funding is effectively invested in Indian government debt. Legally, this is not sovereign external debt because the foreign depositor’s claim is against a bank. Economically, however, the chain is remarkably similar: foreign savings enter India, finance government debt, and create a future dollar outflow whose exchange rate RBI has guaranteed. We could have replicated this more directly by issuing dollar sovereign bonds. India considered doing so in 2019, when the rupee was near ₹70 per dollar. Had those bonds remained unhedged, today’s depreciation alone would have increased their rupee cost by roughly 35–40 percent, before interest. Fortunately, better sense prevailed. The current arrangement reproduces part of that exposure through banks, while adding transaction costs and weakening their balance sheets. Banks must pay foreign depositors, bear the cost of holding relatively low-yielding government bonds, and remain dependent on RBI honouring the guaranteed exit rate. The Market Stabilisation Scheme would have been far cleaner. The government could have issued bonds specifically to absorb the rupees created by these foreign inflows. The proceeds would have been kept in a separate account and could not have financed fresh government expenditure. The bonds’ maturity could have been aligned with the maturity of the foreign liability, allowing both sides of the operation to unwind together. MSS would therefore have clearly identified the amount borrowed solely for sterilisation, its fiscal cost, and the timetable for reversing it. An ordinary OMO obscures this connection because it uses bonds already sitting on RBI’s balance sheet. This leaves an uncomfortable question: why did banks raise such vast foreign funding without a credible plan to deploy the resulting rupees? Capital markets place a premium on good governance precisely because decisions like this destroy value. Two positives need to be acknowledged though: The RBI did not impose CRR and banks refused to handover funds to RBI at 5.24%. This is very good damage control. While I don’t like the overall policy, I must say that the damage control by both RBI and banks has been decent so far.

RBI’s 26-day ₹5 lakh crore VRRR at 5.24% attracted barely ₹60,000 crore, just 12%. Banks are clearly unwilling to lock up funds at this rate. I sincerely hope supervisors are not pressuring them into an uneconomic trade. This obsession with near-zero real rates may cost us dearly. RBI cannot durably absorb liquidity through bond sales while refusing to accept the higher yields those sales would produce. If it leaves the money with banks, let them lend. But it cannot later lecture them about risk-taking and financial stability.

Some ask: if India stabilised the rupee in 2013 after raising only $26 billion through FCNR(B) deposits, why can it not do so now after mobilising $136 billion? The answer is simple. RBI is sensibly retaining these dollars as reserves instead of wasting them defending an arbitrary exchange rate. They seem to have realized it late. In 2013, India faced a genuine emergency. The current-account deficit was near 5% of GDP, government, bank and corporate balance sheets were strained, and conventional defences were failing. Inflation had crossed double digits, so depreciation threatened to make it worse. India therefore borrowed dollars under an RBI exchange-rate guarantee and used the additional reserves to arrest a disorderly fall in the rupee. This was a desperate response to a desperate situation. But it created a major future risk: the deposits would mature together in 2016. India was effectively betting that the economy and global markets would stabilise before repayment became due. Fortunately, they did. Had another crisis arrived in 2016, the maturing deposits could have triggered a run and severe instability. This time, the emergency borrowing itself is difficult to justify. India resorted to it without first seriously trying conventional measures such as higher interest rates. Moreover, the policy of Atmanirbhar Bharat and high-technology oriented industrial policy is hardly consistent with defending an artificially strong rupee. The policy was a panic reaction without much economic substance. Having made that policy mistake, RBI is now acting sensibly with respect to the Dollar. It is allowing the rupee to adjust and preserving the borrowed dollars for eventual repayment. Taxpayers will still bear the cost of the exchange-rate guarantee, but RBI is not compounding that cost by exhausting the reserves as well. In one line: 2013 was a desperate measure during a genuine crisis. Today, RBI is sensibly limiting the damage from an avoidable mistake.

Discussed the points I make regularly here in this business standard article. The article stresses on the importance of removing the excess liquidity and taking pain immediately.

As bond markets across the world tumble, India’s market stands out for its stability. This is because the government and RBI chose to bear the economic pain of Covid immediately rather than postpone it. GDP contracted by nearly 24% in the first quarter, among the steepest falls suffered by any major economy. India endured relentless mocking and trolling, while much of the West printed money to soften the immediate shock. India subsequently emerged with one of the world’s most stable macroeconomic environments. Even The Economist is now being forced to acknowledge the strength of this approach. The lesson is simple: accepting costs upfront is safer than concealing them and transferring uncertain risks to the future. India should follow its own model, not imitate countries now struggling with sticky inflation and rising bond yields. We do not know when the present turmoil will end. I hope the RBI acts seriously and soon.