Malhotra: Agility key for price stability frameworks

Governor Malhotra opened by quoting former Federal Reserve Chair Alan Greenspan, stating that "uncertainty is not just an important feature of the monetary policy landscape; it is the defining characteristic of that landscape.

" Central banks, he noted, have learned to live with this inherent uncertainty by embedding principles like prioritising robustness over optimality and adopting the Brainard principle of attenuation, which advocates for gradualism.

Effective communication and anchoring inflation expectations are also crucial.

Since the pandemic and the Russia-Ukraine war, central banks have shifted to a more flexible, meeting-by-meeting approach, relying on high-frequency data and distinguishing between transitory headline spikes and persistent core inflation trends to avoid unwarranted pre-emptive tightening.

This approach allows them to "look through" first-round impacts of temporary supply shocks, such as those frequently affecting India's food-heavy CPI basket, while remaining vigilant for second-round effects that could generalize inflation pressures.

Malhotra detailed India's rule-based monetary policy framework, which incorporates significant flexibility.

The framework's 4 percent inflation target, coupled with a sufficiently wide tolerance band of +/- 200 basis points, provides the necessary policy space to accommodate short-run volatility from supply shocks without frequent interest rate changes.

This flexibility proved valuable during past disruptions, including the pandemic, allowing for temporary deviations from the target to support growth.

Furthermore, a longer target horizon of three quarters (nine months) offers additional agility in addressing transmission challenges.

The Reserve Bank of India has maintained a neutral stance since June 2025, enabling a nimble and data-dependent response to evolving macroeconomic conditions.