RBI’s Balancing Act: Inflation concerns ease policy path, even as Rupee weakness raises questions

In a policy landscape shaped by softening inflation and a steadily weakening rupee, former RBI Deputy Governor R. Gandhi offered a nuanced view of the central bank’s priorities as it navigates the months ahead. His remarks come amid rising scrutiny of the Reserve Bank of India’s stance on both price stability and currency management.

Inflation, Gandhi said, has now fallen so sharply that it is brushing against the lower end of the Monetary Policy Committee’s mandated range — a development that is “worrisome” and unusual for India. He noted that inflation is “trending down well below 2%, lower corridor of the MPC mandate is worrisome. They naturally will have to pump up inflation. For the first time I would think that in Indian economy we are talking about pumping up inflation.”

He pointed out that even rural inflation dipped into negative territory recently, though this is expected to be temporary. For policymakers, this creates a clear priority: support growth and production. According to him, the rate cuts and liquidity measures announced are aimed precisely at this objective.

With deposit growth lagging credit expansion, Gandhi explained that “some additional resources will have to be made available to the banking system for sustaining the growth prospect, that is why the additional resources that are coming.”

The broader expectation, he said, is that inflation will return above 2%, with MPC projections indicating it should move back into the 4%-plus zone over coming quarters — a trend he described as reassuring. “As of now the measures around are in the right perspective,” Gandhi concluded.

On the currency front, Gandhi pushed back against speculation that the RBI is targeting a particular rupee level. The central bank’s stance, he reiterated, remains focused on curbing volatility rather than defending any threshold. “Exchange rate policy of the Reserve Bank has been consistently stating that they not target a particular rate. It is always to manage the volatilities in the exchange rate… It is a day-to-day affair,” he said. He emphasized that monetary policy will not be dictated by exchange-rate compulsions, reiterating that inflation and growth remain the primary drivers.

Gandhi also pointed to the governor’s statement outlining how forex tools — including swap mechanisms — will be used to manage fluctuations. Market participants, he suggested, often misinterpret RBI’s intentions: “You will not be able to come to the conclusion they are targeting a particular level… somehow market is not wanting to believe that I do not know why.”

The recent bout of rupee weakness, he added, is largely tied to widening trade deficits and routine year-end foreign investor outflows. “Depreciation of rupee is happening more because of the recent development… previous month the imports have been higher than the exports the trade deficit had expanded, so market has reacted to that.”

With FIIs stepping up outflows in recent weeks, he said this is typical around the calendar close and should be manageable. Going forward, he expects the central bank to adjust its actions depending on capital flows and evolving market dynamics.

As the RBI works to steer inflation back upward while keeping currency volatility under control, Gandhi’s commentary underscores an unusual moment for India’s macroeconomic framework — one in which the challenge is not overheating, but ensuring growth has adequate fuel without destabilizing the broader system.