| SUMANSPEAKS | 17 JUNE 2026 |
So Why Are the Ivory Tower Economists Still Shouting About Rate Hikes?
There is a particular species of economist — well-credentialed, frequently quoted, unfailingly confident — who has one solution for every problem. Rupee falling? Hike rates. Inflation ticking up? Hike rates. Bird flu in Pune? Probably hike rates. These are the Ivory Tower economists, and they have been at it again in 2026, prescribing interest rate tightening as the cure for an inflation that has nothing to do with excess money chasing goods.
The uncomfortable truth — uncomfortable for them, at least — is that India's broad money supply (M3) has already been moderating. The monetary tightening they demand is, in a very real sense, already happening organically. Hiking rates on top of that would not be medicine. It would be an overdose.
The RBI, to its credit and Governor Sanjay Malhotra's, has held the line at 5.25% in the June 2026 MPC meeting. The correct call. Let us explain why — with data, not doctrine.
M3, or Broad Money, is the widest measure of money supply in India. Think of it as the total stock of money available in the economy for spending, investment, and credit creation. It has three components:
|
COMPONENT 1
Currency with the Public
Notes and coins in your wallet and your neighbour's mattress
|
COMPONENT 2
Demand Deposits
Current and savings accounts — money accessible immediately
|
COMPONENT 3
Time Deposits
Fixed and recurring deposits — the backbone of M3 at ~76% of total
|
| METRIC | VALUE | SIGNAL |
| M3 — Peak (Jan 2026) | ₹299.04 lakh crore | All-time high |
| M3 — Feb 2026 (latest confirmed) | ₹298.55 lakh crore | Pulling back from peak |
| M3 YoY Growth (Mar 2026) | ~10.7% | Down from 11.5% in Feb |
| Bank Loan Growth YoY (Mar 2026) | 13.8% | Healthy, not overheating |
| Repo Rate (June 2026) | 5.25% — Held | Correct call ✓ |
| FY27 GDP Forecast (RBI, June 2026) | 6.6% ↓ from 6.9% | Growth slowing |
| 1 | M3 Is Already Cooling — Somebody Tell the Rate Hike Brigade |
India's M3 peaked at ₹299.04 lakh crore in January 2026 and has been pulling back since. YoY growth, which was at 11.5% in February, decelerated to 10.7% by March. The money supply is cooling on its own — without any additional rate action from the MPC.
This is precisely what a 100 basis point rate cut cycle — from 6.25% to 5.25% between February and December 2025 — followed by a pause, is supposed to do. The transmission is working. The economy is absorbing the earlier easing. The system is finding its equilibrium.
Adding a rate hike now would be like a doctor who, seeing that the patient's fever has started to break, decides this is the ideal moment to prescribe a higher dose of antibiotics. Because why not? The prescription pad is right there.
| 2 | The Inflation Is Supply-Driven. Rate Hikes Don't Fix Oil Wells or West Asia. |
The RBI's own June 2026 MPC statement is unambiguous. Governor Sanjay Malhotra pointed directly to the ongoing West Asia conflict, elevated crude prices, and global supply chain disruptions as the core drivers of inflationary pressure. CPI inflation for FY27 has been revised upward to 5.1% — with the worst of it concentrated in Q3 (5.9%) and Q4 (5.4%).
Now here is a question for our esteemed Ivory Tower rate-hike enthusiasts: precisely which mechanism does a 25 basis point repo rate increase deploy to resolve a missile strike on a Houthi-controlled oil terminal? Does a tighter SDF rate stabilize the Strait of Hormuz? Can the Marginal Standing Facility rebuild a disrupted Red Sea shipping lane?
Supply shock inflation — and this is supply shock inflation — is not tamed by making domestic credit more expensive. It is tamed by the passage of time, diplomatic resolution, alternative sourcing, and fiscal cushioning. A rate hike in this environment does not reduce inflation. It reduces growth while the inflation laughs at you from the other side of the Arabian Sea.
|
DRIVER 1
West Asia Geopolitical Conflict
Elevated crude prices, supply chain disruption, trade route instability
Repo rate cure: ZERO
|
DRIVER 2
Energy & Commodity Price Shock
Global energy costs rising; imported inflation feeding domestic CPI
Repo rate cure: ZERO
|
| 3 | GDP Is Already Slowing. This Is Not the Moment to Step on the Neck. |
The RBI has revised its FY27 GDP growth forecast down to 6.6% from 6.9% — the third successive trim across MPC meetings. The quarter-by-quarter picture is sobering: 6.6% in Q1, dipping to 6.3% in Q2, before recovering in H2. Goldman Sachs is independently pencilling in 5.9% — significantly more pessimistic than the RBI's own numbers.
In this environment, what does a rate hike achieve? It raises borrowing costs for MSMEs already navigating input cost inflation. It slows investment at precisely the moment when India needs capital formation to accelerate. It damps consumption — which the RBI itself describes as "resilient but fragile" — at the worst possible time.
This is textbook anti-growth policy dressed up as inflation management. The economists prescribing it will, of course, not be the ones explaining to the MSME owner in Surat why his working capital loan just got 50 basis points more expensive while his raw material costs are being set by a conflict three thousand kilometres away.
| 4 | The Ivory Tower Economists — A Gentle Character Study |
Let us be fair. The rate-hike instinct is not born from malice. It is born from a very specific intellectual formation — the belief that every inflationary episode is ultimately a monetary phenomenon, and therefore every inflationary episode has a monetary cure. Milton Friedman said inflation is always and everywhere a monetary phenomenon. He was right — for demand-pull inflation. He said rather less about Houthi missiles and Iranian crude disruptions.
The economists who were prescribing rate hikes to defend the Rupee through early 2026 — as FII selling accelerated and the external account came under pressure — were making the same category error. The problem was not domestic liquidity. The problem was the attractiveness of India as a destination for foreign capital relative to AI-boom markets in the US. Raising rates does not make India's equity market more attractive than NVIDIA's earnings trajectory. It just makes Indian MSMEs pay more for their overdrafts.
The Government and the RBI, to their considerable credit, eventually recognised what was needed: not rate tightening, but a concerted effort to attract foreign capital through structural measures targeting the external sector. Quiet. Practical. Effective. No rate hike theatrics required.
The economists will now write papers explaining why this was the right call all along. They always do.
| 5 | Credit Is Flowing Healthily — Do Not Choke It |
Bank loan growth stands at 13.8% YoY as of March 2026 — down from a peak of 14.5% in February, and well below the 20%+ extremes of late 2023 when credit was genuinely overheating. This is not credit boom territory. This is healthy, productive credit flow supporting an economy in which private consumption remains resilient and capital expenditure is gaining traction.
The monetary transmission mechanism — the chain from repo rate to lending rates to economic activity — works with significant lags. The 100 basis points of cumulative cuts since February 2025 are still working their way through the system. Sectors like manufacturing and construction, which are most sensitive to borrowing costs, are only beginning to see the full benefit of lower rates filter through.
Introducing a hike now — before the full transmission of earlier cuts has played out — would be the monetary equivalent of planting a crop, then digging it up to check if the seeds are germinating. Patience is not a weakness in monetary policy. It is a discipline.
|
|
The RBI's June 2026 decision to hold at 5.25% is not timidity. It is precision. It reflects a reading of the data — M3 moderating, inflation supply-driven, growth slowing, credit healthy — that the rate-hike brigade cannot engage with because it contradicts their single-instrument doctrine.
Sometimes the most sophisticated monetary policy decision is the one that does nothing — and knows exactly why it is doing nothing. That is not an economist's comfort zone. But it is the right answer.
This article is published for informational and educational purposes only and does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. All data sourced from RBI publications, Trading Economics, and Business Standard. Readers are advised to conduct their own research and consult an investment advisor before making any financial decisions. The author's views are his own.
|
For personalised guidance on navigating macro policy shifts and sector-specific implications, Contact: sumanm2007s@gmail.com | suman2005s@rediffmail.com | sumanspeaks.blogspot.com |
.jpeg)
Comments