RBI Governor Sanjay Malhotra addressed a key global forum on monetary policy uncertainty on May 12, 2026. Speaking at a panel discussion jointly organised by the Swiss National Bank and the IMF, he outlined how India navigates supply shocks and shifting economic conditions.
Key Principles Guiding Monetary Policy
Governor Malhotra opened by quoting Alan Greenspan, noting that uncertainty is the defining characteristic of monetary policy. Therefore, central banks must build frameworks that embrace this reality rather than fight it. He highlighted three core principles that guide policy during uncertain times.
The first principle is prioritising robustness over optimality. The second is the Brainard principle, which advocates gradualism in policy decisions. Additionally, anchoring inflation expectations and maintaining clear communication remain essential tools for central bankers worldwide.
He also stressed India’s unique challenge. Food items make up roughly 40% of India’s CPI basket. As a result, agriculture’s dependence on monsoons makes the economy especially vulnerable to supply shocks. However, central banks must judge carefully whether such shocks are temporary or persistent before responding.
India’s Monetary Policy Uncertainty Framework in Action
India’s rule-based framework includes important flexibility. The tolerance band of plus or minus 200 basis points around the 4% inflation target gives the RBI room to absorb short-term volatility. For example, during the pandemic, temporary breaches of the upper band were tolerated to stay growth-supportive.
Meanwhile, the three-quarter target horizon provides additional space to manage transmission challenges. Governor Malhotra noted that average inflation has fallen by about two percentage points since inflation targeting was introduced. This demonstrates the framework’s effectiveness over time.
Regarding the current energy shock, the RBI’s April 2026 MPC resolution adopted a wait-and-watch approach. The RBI has maintained a neutral stance since June 2025, allowing it to stay nimble. Furthermore, the RBI has clearly communicated the conditions that would require policy tightening.
What This Means for India’s Economy
Governor Malhotra emphasised that monetary policy alone cannot resolve supply-side bottlenecks. Close coordination with fiscal and structural policies is necessary. For instance, the government must ease food supply constraints through imports, hoarding prevention, and buffer stock management.
He concluded that flexible, price-stability-focused frameworks remain essential anchors. Central banks must stay data-dependent, continuously reassess risks, and avoid rigid short-term commitments. The path forward lies in enhancing agility and credibility, not abandoning proven frameworks.
Source: RBI Speeches
