The Reserve Bank of India’s Governor Sanjay Malhotra said the second-round effects of supply shocks are the real concern — that is, when inflation expectations rise due to prolonged supply disruption — and preventing such a situation is the primary role of monetary policy.
In a speech delivered at his alma mater, Princeton University, on Saturday, Malhotra said the central bank’s intervention in the foreign exchange market was as warranted and did not commit to an ‘indefensible peg’. The speech was uploaded on the RBI website on Monday.
“When intervention in the foreign exchange market was warranted, the RBI acted — but it did not commit to an indefensible peg,” he said.
The rupee came under pressure following the West Asia conflict in March, when it depreciated over 4 per cent, prompting the central bank to curb speculative trades. Some of those curbs were rolled back on Monday.
“India’s current account deficit was manageable and foreign currency exposure reasonable. The lesson embedded is that for a country at India’s stage of development, the sequencing of capital account liberalisation is not a technicality — it is a first-order question of macroeconomic sovereignty,” he said.
He further said the RBI had maintained controls on the capital account, particularly for residents, and short-term external debt was maintained at levels well below what foreign exchange reserves could comfortably cover.
India’s foreign exchange reserves are at $710 billion, providing cover for over 11 months of imports.
Malhotra said the present crisis, that is, the conflict in West Asia, impacts India as the region contributes about one-sixth of exports, one-fifth of imports, half of India’s crude oil imports, two-fifths of fertiliser imports, and almost two-fifths of inward remittances.
He said the appropriate monetary policy response to such a supply shock is to look through the first-round effect to the extent that it does not feed into second-round dynamics.
“Second-round effects are the real concern. They can materialise if the supply chain disruptions continue for long,” he said. He explained that what began as a supply shock can become embedded in the general price level.
“Preventing this entrenchment is where monetary policy has a primary role to play — through its influence on inflation expectations rather than through blunt demand compression,” he said.
He emphasised that in uncertain times such as this, it is important to be agile and nimble, maintain a broad policy stance, and avoid making firm commitments on the future path of policy.
“In such circumstances, our broad approach has been to be even more data-dependent and to continuously reassess the balance of risks. We are therefore in wait-and-watch mode now,” he said.
He said the Monetary Policy Committee (MPC) of the RBI has been maintaining a neutral stance for the last few policy cycles, which preserves the flexibility to respond as the inflation-growth dynamics evolve.
The MPC, which has cut the policy repo rate by 125 basis points since February 2025, has been maintaining the neutral stance since the June policy review meeting, when it cut the rate by 50 basis points. The last cut was in the December meeting; since then, status quo on both rate and stance has been maintained.
He said fiscal policy has also played an important role in preserving price stability in India, where supply-side factors play a large role in inflation.
“The central government’s fiscal deficit-to-GDP ratio has declined from 9.2 per cent in 2020-21 to 4.4 per cent in 2025-26 (RE). India’s general government debt-to-GDP ratio at 81.1 per cent (in 2024-25) is reasonable, with the world’s top 10 economies (in terms of nominal GDP in USD), other than Germany and Russia, having higher debt ratios than India,” he said.
He said financial stability is the bedrock on which an economy prospers and grows sustainably.
“We have been willing to sacrifice some short-term upside for long-term growth. While some regard this as conservatism, we believe it is prudence,” he said.
He also said the RBI — which is a full-service central bank — has a developmental role to play. He cited the RBI’s role in Jan Dhan account opening, development of UPI, and central bank digital currency initiatives in this regard. He also said the RBI is currently building the Unified Lending Interface (ULI) to give lenders instant digital access to data, allowing them to assess creditworthiness within minutes for small farmers and business owners who previously had no documents to show or had to spend considerable time and effort at a bank.
“We are also pushing the frontiers with our Central Bank Digital Currency (CBDC). It has the potential to make cross-border payments faster and cheaper,” he added.
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