Will RBI Bite the Bullet or Kick the Can Down the Road, Again?

The RBI may be finally staring at a policy turn it has tried to avoid. With inflation pressures building, the rupee weakening sharply, import costs rising, and geopolitical disruptions intensifying, the case for tighter monetary policy has become difficult to ignore. While the February monetary policy seemed an opportune time to raise interest rates given a sharply depreciating rupee and early inflationary signals, the central bank chose to keep both, the rate and stance unchanged, with all members in agreement. Did the central bank miss seeing around the bend? Will missing the signals that were already visible in the economy entail a cost? A deeper concern is whether warning signs of emerging risk, which the central bank’s monetary policy is required to identify, were adequately recognised, interpreted, and incorporated into policy decision-making.

This brings into question two fundamental issues. First, did the inflation data show heightened risk and will the delay in rate hike be costly? Even before the previous, i.e., April monetary policy meeting, inflationary pressures were becoming visible across multiple indicators. The RBI projected one year ahead CPI inflation to be at 4.6 percent with an ‘upside risk’ (April monetary policy statement, 2025). The Consumer Price Index (CPI) inflation climbed to a 13-month high of 3.4 percent in March and crude oil prices remain elevated at a high of $119 in March 2026 (LSEG), continuing into April: developments that would inevitably feed into headline inflation. More puzzling is the apparent underestimation of imported inflation, historically one of India’s most problematic inflation channels. 

The present data reinforces these trends. WPI inflation rose to a 42-month high of 8.30% in April 2026, up sharply from 3.88% in March (Figure 1), an absolute increase of 4.42 percentage points in a single month. This is simply unprecedented and has not been witnessed in the past two decades.

Source: Office of Economic Advisor, DIPP

Trends in imported inflation clearly indicate a sharp rise in costs (Figure 2). This is exacerbated further by steady and faster currency depreciation. CPI inflation is likely to gain further momentum. 

Source: Office of Economic Advisor, DIPP, Authors’ calculations

Policy Signals
Why does this matter? Empirical evidence shows that monetary policy transmission is not only lagged but also asymmetric in different interest-rate phases. The transmission seen during a rate-cut cycle may differ from that during a rate-hike cycle. Figure 3 shows, without implying causality, that the lag in transmission during rate cuts over the last five years has remained shorter than during rate hikes.

Figure 3: Policy rate and credit growth

Source: RBI data, Authors’ annotations

Both elevated WPI and CPI inflation will automatically reflect in higher GDP deflator-based inflation. If nominal GDP continues its recent trend, statistically, real GDP growth is expected to be significantly subdued. Taking into account the rupee depreciation, India’s GDP in dollar terms grew modestly from $3.24 trillion in 2022-23 to $3.93 trillion in 2025-26 — an expansion of just $0.69 trillion over four years, with growth slowing markedly in 2025-26 (Das and Roy Trivedi, April 2026). Inflation and growth data together provide the basis for a stagflation scenario. Is it transitory? Given that the rupee started depreciating before the US-Iran War, it doesn’t seem so. Geopolitical diplomacy hasn't been effective in opening up newer sources of crude oil — indeed, it has worsened. 

This leads to the second concern: did the central bank miss crucial signals? Even if the monetary policy decided to keep the policy rate unchanged, keeping the stance unchanged seems overly optimistic. The importance of the stance lies in the forward-looking direction provided to the market. A sharper hawkish tone is expected to caution not only markets, but also firms and households through the credit transmission channel. Does this reflect a breakaway from recognising risks and using policy signalling effectively?

A reading of the MPC minutes deepens this concern. A simple analysis is presented here: Figure 4a presents the frequency count of inflation-sensitive (hawkish) terms in strengthening contexts and dovish terms in weakening contexts, while Figure 4b depicts the frequency count of uncertainty-related words. As the figures show, there is a much stronger focus on hawkish words than dovish ones, yet both the rate and stance remained unchanged. Uncertainty seems to be the underlying tone of discussion (figure 4b and Table 1), with little reflection in actual policy action.

Additionally, it needs to be iterated that there does not appear to have been a marked deterioration in credit conditions or growth indicators that would justify balancing inflation risks strongly enough to maintain a neutral stance.  

If inflation indicators, imported price pressures, exchange-rate depreciation, and geopolitical risks were all pointing in the same direction, yet monetary policy decisions on rates or stance did not incorporate the upside skew in risks, the concern supersedes just that of delayed tightening.

Table 1: Member wise uncertainty words usage (April Monetary policy minutes) 

Raw data source: April Monetary policy minutes, *Governor, RBI has also highlighted uncertainty driven monetary policy decision making recently here

Both the COVID crisis and US-Iran war have clearly exposed India’s vulnerabilities to uncertainty. Unless supported by meaningful reforms, the flexible inflation-targeting framework alone is incapable of shielding the economy from exogenous supply shocks. Indeed, the time has come for an in-depth introspection and for ushering in India’s second-generation economic reforms after 1992-93.

*Views are personal