MUMBAI: RBI Governor Sanjay Malhotra has said that the real risk from supply shocks lies in their second-round effects, warning that prolonged disruptions can push up inflation expectations and embed price pressures in the broader economy.
Speaking at his alma mater Princeton University on Saturday, Malhotra said preventing such entrenchment is the primary role of monetary policy. The speech was uploaded on the Reserve Bank of India website on Monday.
“Second-round effects are the real concern. They can materialise if supply chain disruptions persist,” he said, adding that what begins as a supply shock can gradually become entrenched in the general price level. He emphasised that monetary policy should focus on anchoring inflation expectations rather than relying on “blunt demand compression”.
Addressing the central bank’s approach to currency management, Malhotra said the RBI intervened in the foreign exchange market when necessary but did not commit to an “indefensible peg”. The rupee had come under pressure following the West Asia conflict in March, depreciating over 4 per cent, prompting the central bank to curb speculative trades. Some of those measures were rolled back on Monday.
He noted that India’s external position remained comfortable, with a manageable current account deficit and reasonable foreign currency exposure. “The sequencing of capital account liberalisation is not a technicality — it is a first-order question of macroeconomic sovereignty,” he said.
Malhotra added that the RBI has maintained calibrated capital account controls, particularly for residents, while ensuring that short-term external debt remains well within the coverage of foreign exchange reserves. India’s forex reserves currently stand at $710 billion, sufficient to cover more than 11 months of imports.
Highlighting the impact of geopolitical developments, he said the ongoing West Asia crisis has significant implications for India, given the region’s importance to trade and remittances. It accounts for about one-sixth of India’s exports, one-fifth of imports, half of crude oil imports, two-fifths of fertiliser imports, and nearly two-fifths of inward remittances.
On policy strategy, Malhotra said the appropriate response to supply shocks is to “look through” first-round effects as long as they do not trigger broader inflationary dynamics. He stressed the need for agility and data dependence in uncertain times.
“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 a wait-and-watch mode now,” he said.
The Monetary Policy Committee has maintained a neutral stance in recent policy cycles, preserving flexibility as inflation and growth evolve. The RBI had cut the policy repo rate by 125 basis points since February 2025, including a 50 bps reduction in June, and has since held rates steady.
Malhotra also highlighted the role of fiscal policy in maintaining price stability in an economy where supply-side factors significantly influence inflation. He pointed to a steady decline in the Centre’s fiscal deficit-to-GDP ratio from 9.2 per cent in 2020–21 to 4.4 per cent in 2025–26 (Revised Estimates).
India’s general government debt-to-GDP ratio stood at 81.1 per cent in 2024–25, which he described as reasonable compared with most of the world’s top 10 economies.
Emphasising financial stability as the foundation of sustainable growth, Malhotra said the RBI has prioritised long-term resilience over short-term gains. “While some regard this as conservatism, we believe it is prudence,” he said.
He also underscored the RBI’s developmental role, citing initiatives such as Pradhan Mantri Jan Dhan Yojana, the Unified Payments Interface, and the central bank digital currency.
The RBI is currently developing the Unified Lending Interface to enable lenders to access borrower data instantly, improving credit assessment for small farmers and businesses. Malhotra added that the central bank’s digital currency initiatives could make cross-border payments faster and cheaper.
Source: Millennium Post
