India's Real Rate Moment: The Cost of Delay

The RBI Should Stop Waiting for Inflation to Prove Itself

TAN's position: the Reserve Bank of India should move off its neutral stance now, with a modest pre-emptive rate hike, rather than wait for more data to confirm what the numbers are already showing.

THE REASONING A

repo rate is not restrictive or accommodative in the abstract - it is restrictive or accommodative relative to expected inflation. At 5.25% nominal, against inflation expectations drifting toward 5.25%, the ex-ante real policy rate is closing in on zero.

A near-zero real rate normally makes sense when an economy needs stimulus. India does not fit that description right now: GDP growth is running at 7.8%, bank credit is expanding at 19.1% year-on-year and the credit-deposit ratio near 80.3% shows banks are already stretched to fund that demand.

Layered on top of healthy domestic demand is an external shock - Brent crude above $100 a barrel after disruption in the Strait of Hormuz - that is pushing costs up regardless of what the RBI does. When a supply shock lands on an economy already running hot, a near-zero real rate does not sit passively; it can actively amplify the inflation it should be containing.

The one-year OIS rate near 6% shows markets already pricing in tightening - the market has, in effect, moved before the RBI has.

THE STRONGEST COUNTER-ARGUMENT

Central banks should not raise rates simply because oil prices went up. Oil shocks are, by nature, supply-side and often temporary; monetary policy cannot make a tanker move faster through the Strait of Hormuz and hiking rates to fight an imported cost shock risks squeezing genuine, productive credit growth for no real gain in controlling the price of crude.

Worse, acting now - with the monsoon's full effect on food prices still unclear - risks a policy error in the opposite direction: choking off a 7.8% growth economy to fight an inflation spike that may partly reverse on its own.

WHY THE POSITION STILL HOLDS

This objection is strongest against a central bank reacting to a single month's oil spike in isolation. That is not what is happening here. Inflation has stayed above target for three consecutive months, core inflation - which strips out food and fuel volatility - has itself risen to around 4.2% and the OIS market is already signalling that tightening is expected.

That combination is the specific evidence that a temporary shock is starting to embed into expectations, not proof that the RBI is over-reacting to noise. The real choice is not "hike now" versus "never hike"

• it is a timely 25-basis-point move now versus a forced 50-basis-point correction later, once expectations have shifted and credibility is harder to win back. Waiting for confirmation is not caution; once expectations move, the RBI is no longer choosing the size of the correction, the correction is choosing itself.