RBI has hiked the repo rate at last but can its monetary policy committee make up for lost time?

Yet, for whatever reason, RBI preferred to wait and see. The net result is that by the governor’s admission, “It is clear that inflation and its outlook are not benign as they were last year, with headline [Consumer Price Index] inflation expected to average almost 5.8% in the next three quarters and core inflation projected at 4.4% this year. In this milieu, recalibrating the policy rate is imperative.”

While this admission is welcome, the fact that it was the first hike since February 2023 and nothing much had changed since the last meet on 26 August makes RBI’s and the MPC’s action just a little questionable.

Will it be a case of too-little-too-late? The fact is inflation in August 2026 was just about 0.3 percentage points higher than in July; sure, the monsoon was worse, but there were enough signs of this at the time of the last policy itself, and the external sector was no better. So, all told, the overall situation was not significantly worse in October than they were two months ago.

Meanwhile, the huge influx of liquidity following RBI’s special swap scheme to draw in more dollars into the system had succeeded beyond its wildest dreams. All of which forced the central bank to finally act.

If the governor, Sanjay Malhotra, felt any awkwardness in doing a blatant about-turn, he hid it very well. In August, he was emphatic that “the growth-inflation dynamics is more or less similar to that in the last policy meeting” when the MPC held rates constant. This time round, the growth-inflation dynamics have changed, but only marginally. Yet, RBI, fortunately for us, decided to act.

Hopefully, it will not be a case of better-late-than-never. Even at the newly-hiked rate of 5.50%, the real policy repo rate is negative, if one accepts the MPC projected rate of inflation during the third quarter (6%) and the fourth quarter (5.7%).

True, the inflation we are experiencing now is largely supply-side inflation, where monetary policy primarily acts by curtailing second-round effects, which in the governor’s words “take time to manifest and are difficult to extract from available data.”

But this is precisely why we have central banks—to look through the data and see what is likely to stay and what is temporary. Sure, there are only “limited signs of supply-side pressures getting embedded in pricing behaviour.”

Similarly, there is limited evidence of demand-side pressures. Despite this—limited signs of either supply-side or demand-side price pressures—if the MPC unanimously voted to hike rates, it is because RBI, like other central banks such as the US Federal Reserve, the European Central Bank and the Bank of Japan before it, realized that monetary policy must be forward looking and hence preferred to act in advance.

It is true that India’s economic growth is doing well—projected growth for the current fiscal year has been raised by 40 basis points to 7.1% by RBI—but this higher growth comes at a price—higher inflation that is now estimated at 5.2% in 2026-27 as against 5% earlier—that may make the very growth itself unsustainable.

Clearly, the rate hiking cycle is here to stay. It is possible, as the governor says, that “the duration and extent of rate hike cycle would be contingent on the actual growth-inflation developments and outlook, especially that of underlying inflation.”

It is also possible that RBI favours the ‘baby steps’ approach adopted during the time of the former governor Duvvuri Subbarao between March 2010 and October 2011, when it raised the policy repo rate by 25 basis points at a time across 13 consecutive moves (from 3.25% to 8.25%).

But whether it will suffice when the economy remains among the world’s fastest-growing major economies remains to be seen.

Remember, these are not normal times. If the US neutral rate has moved up, and India wants to attract capital flows, it is not enough to have 7% GDP growth and inflation at 5%, as indicated in the Monetary Policy Report released along with the RBI rate decision. It means we need a higher rate of interest as well. Yet, two external members of the MPC preferred to maintain the stance at neutral rather than signal higher rates in the foreseeable future.

For a governor, who just days before the MPC meet, had declared at the 5th Kautilya Economic Conclave held in New Delhi that in “central banking, invisibility is perhaps the most meaningful measure of success,” it is no longer possible to stay invisible.

The central bank and its monetary policy panel (well most of the MPC, if not all its members) seem to have realized that “Monetary policy may be 98% talk and only 2% action, but the cost of sending the wrong message can be high,” as a former Fed chair said. One only hopes it is not too late for sending the right message.

Mythili Bhusnurmath

Mythili Bhusnurmath is an economist-turned-banker-turned journalist. She became the first woman editor of a major financial daily, Financial Express, in 2004. She has been Opinion page editor at The Economic Times, consultant to the Prime Minister’s Economic Advisory Council, and Senior Consultant at National Council of Applied Economic Research, Delhi.She turned to journalism after 16 years with SBI and RBI. She has an MA in economics from Delhi School of Economics, is a Certified Associate of Indian Institute of Bankers, and holds a law degree from Delhi University. She is the recipient of the Distinguished Alumni award from the Delhi School of Economics, has interviewed a number of distinguished economists, policy makers and political figures such as the heads of the International Monetary Fund, the WTO as well as former PM of India, Manmohan Singh and the present PM, Narendra Modi, when he was the chief minister of Gujarat.Post her retirement, she writes in Economic Times and contributes articles and editorials to Mint.