RBI Price Stability: How FIT Lifted Growth in 2016-25

What the RBI governor told Princeton University

Reserve Bank of India (RBI) Governor Sanjay Malhotra said India’s economic growth over the last decade has been supported not only by consumption, investment, and services, but also by the central bank’s focus on price stability. Speaking at Princeton University on April 18, Malhotra linked India’s stronger growth performance to a formal policy framework that anchors inflation expectations while allowing room to respond to supply shocks. He described the RBI as a “full-service” institution that manages currency, foreign exchange, and payment-system regulation, alongside monetary policy.

Malhotra’s central argument was that predictable inflation outcomes help an economy sustain growth through global volatility. He also pointed to the role of government supply-side measures in reducing inflationary pressure, suggesting that macro stability has come from both monetary and fiscal actions.

India’s growth compared with global peers

Malhotra said India grew at an average 6.1% a year over the last decade. In comparison, he cited average global growth of 3.2%, with China at 5.6% and Indonesia at 4.2%. The governor framed this as evidence of resilience backed by policy frameworks and credible institutions built over several years.

He added that this resilience was “not by chance” and rested on stability and inclusion. In his remarks, he positioned macro stability as an enabling condition for private sector activity, rather than a substitute for core drivers like demand and investment.

Flexible Inflation Targeting and its reported results

A key part of Malhotra’s speech was the RBI’s adoption of the Flexible Inflation Targeting (FIT) framework in 2016. He said average inflation fell to 4.7% in the September 2016 to December 2025 period, from 7.4% in the earlier April 2012 to August 2016 phase.

The current inflation point target is 4%, with a tolerance band of plus or minus 2 percentage points. Malhotra said the relatively wide band helps the RBI navigate internal and external supply shocks, especially given the significant weight of food and fuel in India’s CPI basket.

How the RBI says it responds to supply shocks

On the West Asia conflict, Malhotra said the appropriate monetary policy response to a supply shock is to “look through” the first-round impact as long as it does not feed into second-round effects. He said maintaining a neutral policy stance preserves flexibility as inflation and growth dynamics evolve.

He described the RBI’s approach as increasingly data-dependent, with continuous reassessment of risks. “We are therefore in wait-and-watch mode now,” he said, referring to how uncertainty can complicate monetary policy decisions.

Fiscal measures that the RBI says helped curb inflation

Malhotra said the government’s fiscal measures complemented the RBI’s stance through supply-side interventions. He cited steps aimed at building resilience in agriculture, strengthening warehouse supply chains, and reducing the volatility in crude prices.

In a broader discussion on fiscal consolidation, he noted that the central government’s fiscal deficit declined from 9.2% in 2020-21 to 4.4% in 2025-26. He also highlighted the Direct Benefit Transfer (DBT) system as an efficiency gain, which he said saved an estimated USD 50 billion by early 2024.

Why West Asia matters for India’s macro outlook

Malhotra highlighted India’s exposure to West Asia, describing it as critical to the economy. He said the region supplies one-half of India’s crude oil imports and accounts for two-fifths of inward remittances.

He also pointed to the potential growth impact from higher input costs if energy prices rise, alongside increased international freight and insurance costs. Supply-chain disruptions, he said, could constrain key inputs for downstream sectors. He added that government measures aimed at supporting exports and protecting supply chains should mitigate some adverse effects.

Latest policy settings: repo rate, stance, and liquidity

The RBI’s Monetary Policy Committee (MPC) kept the repo rate unchanged at 5.25% and retained a ‘Neutral’ policy stance. Malhotra noted that the RBI has already cut the repo rate by a cumulative 125 basis points since February 2025.

On liquidity, Malhotra said the RBI has ensured ample liquidity to support transmission of earlier rate cuts and is not looking at changes in liquidity management. Separately, he has said the RBI infused about Rs 9 lakh crore of durable liquidity into the banking system, which is currently in surplus.

Growth and inflation signals cited by the RBI

Under the new GDP series (base year 2022-23), real GDP growth for 2025-26 is estimated at 7.6%, according to the material shared alongside the policy narrative. For 2026-27, real GDP growth is projected at 6.9%, with quarterly projections of 6.8% (Q1), 6.7% (Q2), 7.0% (Q3), and 7.2% (Q4).

In another public forum, Malhotra said the RBI revised its growth estimate for the current fiscal year to 6.8% and lowered its inflation projection to 2.6%, attributing the change to an above-normal monsoon and GST rate rationalisation. He also referenced earlier RBI projections from August that put growth at 6.5% and inflation at 3.1%.

Key numbers at a glance

Why the price-stability message matters for markets

Malhotra’s comments underline how the RBI is framing price stability as an input into durable growth rather than a narrow inflation objective. The emphasis on “looking through” first-round supply shocks, while guarding against second-round effects, signals a preference to avoid overreacting to temporary price spikes when uncertainty is driven by global events.

For investors, the combination of a neutral stance, a wait-and-watch approach, and a focus on liquidity transmission clarifies the RBI’s near-term operating posture. It also places greater weight on incoming data, including how global energy prices and supply chains evolve, given India’s exposure to West Asia.

Conclusion

Malhotra’s Princeton University address positioned the FIT framework and price stability as key contributors to India’s stronger growth performance relative to major peers. He also stressed fiscal-monetary coordination through supply-side interventions and fiscal consolidation. With the repo rate held at 5.25% and the RBI in wait-and-watch mode, the next set of policy signals is likely to hinge on how supply shocks, inflation prints, and high-frequency activity indicators evolve in the coming months.