Is RBI falling behind the curve again?

Given the long lags in monetary policy's impact on the real economy, too much caution could prove unnecessarily costly

- AJAY CHHIBBER

With consumer price index (CPI)-based inflation dropping to 3.16 per cent in April and likely to fall below 3 per cent in May, is the Reserve Bank of India (RBI)—through its Monetary Policy Committee (MPC)—falling behind the curve again? The RBI has historically been a poor predictor of inflation. It was slow to reduce the repo rate from 6.5 per cent throughout 2024 and has only now started to ease it slowly, with 25 basis point cuts in both February and April. Meanwhile, the real repo rate now stands at an exceedingly high +2.84 percentage points.

This is the same mistake made between 2015 and 2019, when real rates were kept extremely high—averaging +2.2 percentage points—and hurt economic growth (see table). At that time, the RBI's inflation expectations were seriously flawed and consistently higher than actual inflation. This persistent error kept real repo rates too high for a prolonged period. The RBI (and the MPC) became what economic literature refers to as "inflation nutters"—that is, they focused solely on inflation and not on their dual mandate of growth and inflation.