RBI must maintain a calibrated approach

KV Subramanian is identified as a professor of finance at the Indian School of Business and former executive director at the IMF.

The author calls for inflation management to be a Cabinet responsibility, emphasizes supply-side responses to supply shocks, and advocates a calibrated RBI stance that protects investment while maintaining price stability.

As consumption is unresponsive to rates, tighter policy would fall on investment, potentially dampening a nascent private investment recovery that the article says has been weak for over a decade, threatening growth.

It acknowledges the risk of rupee depreciation and higher oil costs in rupee terms but argues monetary policy should not compound the damage; calls for fiscal measures such as calibrated fuel taxes by central and state governments, buffer stock management, and logistics reform.

The article contends that unlike advanced economies where households borrow to fund discretionary spending, India's borrowing is mainly for housing and small business, so routine consumption is driven by income, not credit, making rate hikes a blunt instrument.

Relying on the Household Consumption Expenditure Survey and RBI credit data, the author argues that only roughly 2-4% of consumption in India is genuinely sensitive to changes in the repo rate after adjustments for rent, imputed rent, and informal financing.

The piece notes oil prices rose from about $65 to over $100 as tensions in West Asia intensified, framing this as an imported oil shock rather than a domestic demand-driven inflation.

The article, authored by KV Subramanian, argues that the RBI should maintain a calibrated stance and not reflexively tighten monetary policy in response to an oil-shock-driven inflation spike, framing such moves as inappropriate for India.