For central banks, crisis management is the new normal: Malhotra

Monetary policy has shifted from fine-tuning to “perpetual crisis management,” with standard models built on stable relationships now “creaking” under today’s realities, Reserve Bank of India (RBI) governor Sanjay Malhotra said on Friday at the Kautilya Economic Conclave in New Delhi.

Framing the job as steering through turbulence with two fixed stars—price stability and financial stability—Malhotra said the belief from the mid-1980s to 2007 that business cycles were tamed gave way to a “rude awakening” during the 2008–09 crisis, followed by overlapping shocks: the US banking stress, Europe’s sovereign-debt crisis, the 2013 taper tantrum, trade reversals, the pandemic, the war in Ukraine, and frequent weather extremes.

These were “complex, exogenous events” that hit growth while pushing prices up, “a devil’s choice” for policymakers, he said.

On India’s response, Malhotra said flexible inflation targeting let the RBI support growth during the pandemic, then “quickly shift gears” to contain prices.

RBI cut the repo rate to the lowest level in the inflation-targeting era, injected targeted liquidity with preset end dates, and used forward guidance “as long as necessary” to revive activity without weakening counterparty or collateral standards, he said.

As shocks rolled on in 2022, policy moved early to tightening, starting with a change in stance in April and an off-cycle hike in May.

With food at roughly 45–46% of the Consumer Price Index (CPI) basket, supply measures had to complement rates, while monetary policy focused on preventing second-round effects into core inflation, the governor said.

By early 2025, Malhotra said, India was the fastest-growing large economy and by February inflation had returned to the 4% target.

Official data put February CPI at 3.61%. Bank and corporate balance sheets remained strong, aided by pre-planned exits from extraordinary measures and steadier fiscal settings, he said.

Looking outward, Malhotra warned that high public debt, wider use of tariffs, and diverging growth paths could keep global output below potential.

Some fiscal risks look under-priced, equity markets appear complacent, and persistent above-target inflation in advanced economies could test central-bank credibility even as policy eases, he said.

Oil has stayed range-bound despite geopolitical tension, reflecting lower oil intensity of GDP, while gold may now be a clearer barometer of uncertainty, he said.

“You cannot control the storm, but you can certainly steer the ship,” Malhotra said.

India, he argued, has built “very strong” macro foundations such as reserves, low inflation since February, a narrow current-account gap, credible fiscal consolidation, and resilient balance sheets, that make it “an anchor of stability in a volatile world.”