RBI’s Balancing Act: Inflation provides a smoother policy path even as rupee weakness raises questions

In a policy landscape shaped by declining inflation and a steadily weakening rupee, the former deputy governor of the RBI R.Gandhi offered a nuanced view of the central bank’s priorities over the coming months. His comments come amid increasing 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 hitting the lower end of the Monetary Policy Committee’s mandate – a development that “concerning” and unusual for India. He noted that inflation is “The lower range of the MPC mandate, which falls well below 2%, is worrying. Obviously they will have to pump up inflation. For the first time in the Indian economy, I would think we are talking about pumping up inflation.”

He pointed out that even rural inflation has recently turned negative, although this is expected to be temporary. For policymakers, this creates a clear priority: supporting growth and production. According to him, the announced interest rate cuts and liquidity measures are aimed precisely at this goal.Because deposit growth lags behind credit expansion, Gandhi explained “There will need to be some additional resources made available to the banking system to support growth prospects, which is why the additional resources are coming.”

The broader expectation, he said, is for inflation to return above 2%, with MPC projections indicating it should move back towards the 4%-plus zone in the coming quarters – a trend he described as reassuring. “From now on, the measures are all 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 position, he reiterated, remains focused on curbing volatility rather than defending any threshold. “The Reserve Bank’s exchange rate policy has consistently stated that they do not target a particular rate. It is always intended to manage the volatility of the exchange rate… It is a day-to-day affair,” he said. He emphasized that monetary policy will not be dictated by exchange rate coercion, and reiterated that inflation and growth remain the main drivers.

Gandhi also pointed to the governor’s statement outlining how forex instruments – including swap mechanisms – will be used to manage fluctuations. Market participants, he suggested, often misinterpret RBI’s intentions: “You’re not going to be able to conclude that they’re targeting a certain level… somehow the market doesn’t want to believe that I don’t know why.”

The rupee’s recent weakness, he added, is largely related to widening trade deficits and routine outflows of foreign investors at year-end. “The depreciation of the rupee is happening more because of the recent development… last month, imports were higher than exports, the trade deficit had widened, so the market has reacted accordingly.”

With the FIIs increasing outflows in recent weeks, he says 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 changing market dynamics.

As the RBI tries to send inflation back up while containing currency volatility, Gandhi’s comments underline an unusual moment for India’s macroeconomic framework: one when the challenge is not overheating, but ensuring that growth is adequately fueled without destabilizing the broader system.