RBI's 'jinx' rate has dogged it for 10 years -- What's causing it?

It is like a jinx dogging the Reserve Bank of India (RBI) for the past 10 years. The last three governors happened to demit office when rates touched 6.5%. This is not to suggest that the level acts like an unofficial policy boundary or that the exits were anything but routine. But tenures happened to end, or were not renewed, when interest rates reached 6.5%.

In reality, three exits and an imaginary hurdle rate may be hiding another truth: confusion over the natural rate of interest and, perhaps, the need for a relook at RBI's inflation targeting regime.

The significance of this number, 6.5%, cannot be overstated when viewed against the fact that RBI's current monetary policy committee (MPC) has started raising interest rates.

Minutes of the MPC meeting held from 5-7 October 2026 suggest that another cycle of rising interest rates may have just begun. MPC members voted to raise the benchmark interest rate to 5.5% but more than one member felt that while rate cuts were off the table, future rate increases could not be ruled out.

A 100 basis points still separate the current interest rate and the jinx rate, but this space needs watching.

Let us start with Raghuram Rajan, who was appointed in September 2013 during the Manmohan Singh government. The start of his tenure was baptism by fire: he joined when the inflation rate was close to 10%. Soon after, he had to quell fires ignited by the US Federal Reserve's policies, which resulted in huge outflows of foreign exchange.

Rajan had to raise interest rates rapidly, from 7.25% to 8%. In June 2014, a new government was sworn in and, truth be told, he was not their preferred candidate.

Rajan started cutting rates from January 2015, bringing them down to 6.5% by April 2016. But any hopes he may have had of getting a second term were dashed, and he vacated office by September 2016, leaving rates at 6.5%, lower than where he had found them.

In came Urjit Patel, who was already deputy governor at RBI, and author of the report that was used to legislate the current monetary policy framework. Displaying amazing alacrity, he slashed interest rates to 6.25% within a month of taking over.

Demonetization in November 2016 may have upended his plans, probably delaying the next rate cut -- to 6% -- all the way to August 2017. Soon after, he was on a collision course with the government over threats to the central bank's perceived autonomy and the alleged softening of new bankruptcy policies.

He started increasing interest rates and after a two-episode binge of taking rates back to 6.5%, he suddenly resigned in December 2018 for what he said were "personal reasons." Patel became the second RBI governor, after Benegal Rama Rau in 1957, to resign before the official end of the term.

Enter Shaktikanta Das, a career bureaucrat. He took a machete to interest rates: they came down from 6.5% to 5.15% between February and October 2019. The ensuing pandemic forced him to take rates all the way down to 4%, a historic low.

Rates would have stayed at that level for a prolonged period had Russia not attacked Ukraine in February 2022, leading to a spike in energy prices. Rates started inching up from May 2022 and, by February 2023, they were back at 6.5%.

Interestingly, the repo rate remained stock-still at 6.5% through 11 MPC meetings, till the governor's term ended in December 2024, after a full two-term stint. Was he expecting a third term? We don't know, but the rate was back at 6.5% when he left office.

Das was succeeded by Sanjay Malhotra, another career bureaucrat, who also marked the start of his tenure by cutting rates all the way down to 5.25%. Geopolitical flashpoints and elevated energy prices have forced rates to start climbing again, but to only 5.5% for now. The street expects the MPC to hike rates once again when it meets in the first week of December.

So, what's with the 6.5% level? While there is no stated policy so far, empirical evidence suggests it may have some talismanic value.

Or, there could be a link to an undisclosed natural interest rate (NIR), or r*, a theoretical construct where monetary policy is neither expansionary nor contracting, inflation is stable near the targeted rate and output is near potential.

According to the two versions of NIR floating out there -- RBI's 1.4-1.9%, and former MPC member Ashima Goyal's 1% -- are currently still stimulatory, generating both demand and inflationary impulses.

The tide may turn when real interest rates relative to NIR become contractionary and anti-inflationary. But without regular NIR updates from RBI, we are dealing with imaginary lines in the sand.

There may even be a case for re-examining the current policy framework. A recent article in Mint by former RBI governor C. Rangarajan and Madras School of Economics director N. Bhanumurthy suggested that calibrating interest rates alone, without a policy on money supply, may not be sufficient to control inflation.

There is also the incomplete adoption of Urjit Patel's inflation targeting model. For example, the report had stated that inflation targeting would not work if government failed to keep fiscal deficit at or below 3% of gross domestic product, which has never been achieved.

In the absence of government discipline, the burden on monetary policy to compensate for these sources of inflationary pressures has heightened with time, with 6.5% seemingly becoming the unofficial Rubicon.

The author is a senior journalist and author of 'Slip, Stitch and Stumble: The Untold Story of India's Financial Sector Reforms' @rajrishisinghal