How RBI’s Monetary Policy Manages Inflation Without Hurting Growth in India The Reserve Bank of India (RBI) plays a crucial role in maintaining macroeconomic stability through its monetary policy. Its dual objective is to maintain price stability while fostering sustainable economic growth. Since 2016, the RBI has adopted a Flexible Inflation Targeting (FIT) framework, with a Consumer Price Index (CPI) target of 4% ± 2%, allowing for policy flexibility based on prevailing conditions. How RBI Manages Inflation The RBI uses various monetary tools to control inflation: Repo Rate, CRR, SLR, and Open Market Operations (OMO) influence liquidity in the banking system. During high inflation, the repo rate is raised to discourage excessive borrowing, thus reducing demand-led price pressures. A stable and predictable inflation outlook helps anchor expectations of households, businesses, and investors, creating confidence in the economy. Impact on Growth While inflation control is vital, higher policy rates can dampen economic momentum: An increase in interest rates leads to costlier loans, affecting sectors such as real estate, automobiles, and MSMEs. Private consumption and capital investment may slow down, impacting GDP growth. Post-Pandemic Policy Approach During the pandemic, the RBI adopted an accommodative stance, keeping interest rates low to support growth and liquidity. As global inflation surged due to supply disruptions and geopolitical tensions, the RBI gradually raised the repo rate from 4% to 6.5% between 2022 and 2024. These calibrated rate hikes helped bring inflation back within the RBI’s 2–6% target band, without triggering a major slowdown. Challenges and Criticisms Supply-side inflation (e.g., food, fuel) is not easily managed by interest rate changes. Excessive tightening can affect employment, especially in the informal and rural economy. The transmission mechanism of policy is uneven across the banking system and less effective in reaching non-banking financial sectors. Experts argue that the RBI should focus on a broader mandate, balancing price stability with employment and output growth, like the US Federal Reserve. India’s monetary policy has succeeded in containing inflation while avoiding deep disruptions to growth. However, it cannot work in isolation. To effectively balance inflation and growth, monetary measures should be supported by fiscal policies, structural reforms, and supply-side interventions. A flexible and data-driven approach is key to navigating future uncertainties.