RBI Governor Sanjay Malhotra shared India’s approach to monetary policy under uncertainty at a joint SNB-IMF conference on May 12, 2026. He outlined how India’s flexible, rule-based framework helps navigate supply shocks and shifting global conditions.
Key Principles Guiding RBI Monetary Policy
Governor Malhotra opened by quoting Alan Greenspan: uncertainty is not just a feature of monetary policy — it is the defining characteristic. Therefore, central banks must build frameworks that embrace uncertainty rather than avoid it.
He highlighted three core principles. First, robustness should take priority over optimality during uncertain times. Second, the Brainard principle encourages gradualism in policy decisions. Additionally, anchoring inflation expectations through clear communication remains essential.
India faces a unique challenge. Food items make up roughly 40% of the CPI basket, and Indian agriculture depends heavily on monsoons. As a result, supply shocks are frequent and must be managed carefully without disrupting growth.
When a supply shock appears temporary, the RBI generally looks through the first-round price impact. However, if second-round effects emerge — such as rising wages or generalised inflation — tighter policy becomes necessary. Monetary policy alone, meanwhile, cannot resolve supply-side bottlenecks. Close coordination with fiscal and structural policies is therefore critical.
How India’s Monetary Policy Framework Handles Uncertainty
India’s inflation-targeting framework has delivered results. Average inflation has fallen by around two percentage points since targeting was introduced. The framework combines rules with built-in flexibility, allowing the RBI to respond to evolving circumstances.
The tolerance band of ±200 basis points around the 4% inflation target provides vital policy space. For example, during the pandemic, temporary breaches of the upper band were accommodated to stay growth-supportive. The nine-month target horizon also gives the RBI room to manage transmission challenges.
Regarding the current energy shock, the RBI’s April 2026 MPC resolution clearly stated that waiting and watching remains prudent. The RBI has maintained a neutral stance since June 2025, which preserves flexibility to act swiftly as new data arrives.
Governor Malhotra concluded that price stability frameworks must stay agile. Central banks should look through transitory shocks, avoid rigid short-term commitments, and reassess risk balances continuously. Ultimately, whether to look through an inflation episode depends on its duration and how broadly it spreads across the economy.
Source: RBI Speeches
