Baby Steps, Festina Lente, and RBI’s June Policy Misstep

“Baby steps.” “Festina lente.” “Cross the river by feeling the stones.”

These were not rhetorical flourishes. They were operating principles that shaped the Reserve Bank of India’s monetary conduct through periods of uncertainty. They reflected a belief that when transmission is uneven and markets fragile, pace can matter as much as direction.

In the hindsight, that tradition invites a counterfactual question. Not whether the RBI eased too much or too little in June, but whether it moved too quickly.

The case for monetary support was clear. Inflation was easing, global uncertainty was rising, and growth impulses needed reinforcement. Few would dispute the direction of policy. The question was one of method. In a large, bank-dominated economy like India’s, monetary policy rarely transmits cleanly through a single decisive move. It works instead through expectations, confidence, and the perceived durability of the policy path.

June marked a departure from the RBI’s long-standing instinct for gradualism. A large rate cut was delivered alongside a substantial liquidity injection through a reduction in the cash reserve ratio, and then capped with a sudden shift to a neutral stance. The package was bold, but also conclusive. It compressed what could have been an extended easing journey into a single announcement, leaving markets to infer that most of the work had already been done.

A slower path is easy to imagine. A smaller cut, accompanied by unmistakably dovish guidance, would have kept the easing cycle visibly alive. Follow-up moves, even if incremental, would have reinforced that message. Such sequencing would not have insulated India from global shocks, but it might have improved how markets absorbed them.

Even subsequent dovish signalling, including Friday’s dovish hold, has struggled to reverse this perception. Markets have continued to behave as if the easing impulse is fragile rather than durable, reinforcing the counterfactual question of whether a slower initial pace might have anchored expectations more effectively.

The question matters because transmission is not mechanical. Banks pass on cuts more readily when they believe easing will persist. Bond markets demand lower premia when policy optionality is preserved. When the path appears abrupt or potentially reversible, caution sets in. Liquidity is managed defensively, spreads resist compression, and yields harden even when inflation remains benign.

Subsequent developments have gone decisively against local markets. Global rates have firmed amid renewed trade uncertainty. Portfolio flows have turned volatile. Foreign exchange intervention has drained liquidity significantly. State borrowing has been heavy, and regulatory changes have tested risk appetite. These forces would have challenged any monetary framework.

The question is whether a more gradual easing cadence could have made the system more resilient when those pressures arrived.

Gradualism does not eliminate shocks, but it may cushion their transmission. When markets believe the central bank is still mid-crossing, feeling for the next stone, they are less likely to assume that policy space has already been exhausted. That belief could have helped steady yields and improve pass-through.

This matters more in today’s monetary setting. Inflation is anchored. Growth constraints are increasingly structural. Liquidity operations and communication now do more of the work than headline rate changes. In such a regime, big-bang moves offer diminishing returns, while the costs of mis-sequencing rise.

None of this implies that June steps were wrong in intent. It raises a quieter, more enduring question about pace. Would baby steps have kept markets better aligned with policy? Would festina lente have preserved flexibility as global conditions inevitably turned less benign?

Central banking has never been about certainty. It has always been about judgment under uncertainty. The RBI’s own institutional memory suggests that when the river is wide and the current unclear, crossing it slowly can sometimes be the surest way across.