The RBI's Growth Test: Why Chasing Inflation Ghosts Is a Goddamn Waste of a Good Central Bank
The RBI's own June 2026 policy tells the real story better than any op-ed can. Headline CPI came in at 3.48% in April — the sixth straight month of a gentle rise, but still comfortably inside the 4±2% band, with core inflation steady around 3.7%. The one component doing the heavy lifting is food, up 4.2% in April from 3.87% in March, largely a monsoon and mandi story. The MPC held the repo rate at 5.25% for a third straight meeting, not because prices are exploding, but because it's nervous about what a jumpy West Asia and a temperamental El Niño might do next. That's a central bank hedging against weather and geopolitics — not a central bank fighting a demand-side inflation fire. There's a difference, and it's the difference between good policy and cargo-cult policy.
1 |
Growth Isn't the Enemy of Price Stability. It's the Point of Having One. |
Somewhere along the way, inflation targeting stopped being a tool and became a religion. The RBI's mandate is 4%, plus or minus 2 — a band, not a shrine. Yet every discussion of monetary policy in this country treats 4.01% as sacrilege and 3.99% as salvation, as if the ninth decimal place of the CPI print carries more information than the health of the actual economy generating jobs, wages, and tax revenue underneath it.
Meanwhile, real GDP growth for FY27 has already been trimmed to 6.6%, down from an earlier 6.9%, on the back of global uncertainty and supply disruption — not runaway demand. That's a slowdown signal, not an overheating signal. An economy cooling under its own potential doesn't need a central bank standing on the brake pedal because tomatoes had a bad week. It needs oxygen.
2 |
M3 Is Expanding. That's Not the Scandal You Think It Is. |
India's M3 — broad money, the whole circulatory system of the economy — crossed roughly ₹313.6 lakh crore by late May 2026, continuing a multi-year run of steady, healthy expansion. On paper, that number alone gets the hawks reaching for their pitchforks: more money chasing goods, ergo inflation, ergo hike rates, case closed. Except the case isn't closed. It's barely been opened.
Money supply becomes inflationary only when it persistently outpaces the economy's capacity to absorb it — when too much money is chasing the same, unchanged basket of goods. That's a velocity question, not a volume question. And that's precisely the nuance the central bank's own defensiveness keeps burying. Holding the repo rate at 5.25% for a third straight meeting isn't muscular inflation-fighting. It's a shield raised against a ghost. The real tell is the growth forecast getting quietly trimmed to 6.6% alongside it — proof the domestic engine is running short of fuel, not overheating on it.
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Has the Velocity of Money Changed? Not Really — And That's the Whole Argument. |
Velocity of money, for anyone who dozed through that lecture, is simply how many times each rupee changes hands to produce a rupee of GDP. Fisher's old equation — MV = PQ — reduces the whole inflation debate to one clean idea: prices rise when money grows faster than the real output it's chasing, adjusted for how briskly that money circulates.
Nominal GDP growth for FY27 is tracking around 10–10.5%, while M3 has been expanding at a broadly similar, slightly faster pace over the trailing year. Run the arithmetic and velocity isn't spiking — it's flat to mildly declining, continuing the multi-year pattern since the pandemic-era liquidity surge. Money is not sloshing through the economy faster and faster, bidding up prices in a frenzy. It's moving at a steady, almost boring pace. Boring, in monetary policy, is a compliment.
This is the detail that gets buried under every food-inflation headline: a stable or gently falling velocity means the M3 expansion is not translating into runaway demand-pull inflation. It's mostly sitting in savings accounts, term deposits, and — as we've flagged before — increasingly in real estate, rather than sprinting through the cash registers of the country. A rupee that's parked earns no inflation. A rupee that's sprinting does. Right now, the rupee is parked.
| M3 (Broad Money), May 2026 | ≈ ₹313.6 lakh crore |
| Nominal GDP Growth, FY27 (est.) | ≈ 10–10.5% |
| Headline CPI, April 2026 | 3.5% |
| Core CPI, April 2026 | 3.7% (steady) |
So here's the SumanSpeaks arithmetic: if velocity is steady, and core inflation is steady, and the money is parked rather than sprinting — the RBI has more room than its own June commentary admits. The rate hold wasn't wrong; it was cautious. But caution has a shelf life. If the monsoon behaves and West Asia stays quiet through the next print, a rate cut in the second half of FY27 isn't just plausible — it's the textbook conclusion the data is quietly building toward, food-price headlines notwithstanding.
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The Ghost in the Machine: What a Parallel Economy Does to Your Inflation Print |
Here's the part nobody puts in the official commentary. India's M3 figures capture the formal, bank-mediated economy — deposits, currency in circulation, institutional funds. What they cannot capture is the cash that never sees a ledger: undeclared income, informal trade settlements, cash-only transactions in mandis and construction sites, and the wide unbanked corridors of rural and semi-urban commerce.
A parallel economy of this kind doesn't show up in M3, but it absolutely shows up in prices. When untracked cash chases the same limited basket of essentials — vegetables, pulses, seasonal produce — it bids up prices at the mandi level long before any of it registers in a bank statement. The CPI basket feels the heat. The M3 chart stays innocent. That mismatch is precisely why food inflation can spike sharply even when official broad money growth looks perfectly disciplined — the demand pressure is coming from a stream the RBI's monetary aggregates were never designed to see.
This is the SumanSpeaks point in one line: you cannot use a rate hike to discipline money the formal banking system never measured in the first place. Raising the repo rate squeezes formal credit — home loans, corporate borrowing, working capital — while leaving the untracked cash economy completely untouched, because that cash was never in the banking system to begin with. It's punishing the honest taxpayer with a home loan for inflation partly generated by transactions that never touched a bank. If that isn't a design flaw, I don't know what is.
5 |
Follow the Capital: Why Concrete Is Beating the Sensex |
Here's the piece nobody wants to say out loud in a Budget press conference. If the money is genuinely steady and not sprinting, and it isn't racing into a jittery, heavily taxed equity market, where exactly is it going? Follow it, and it lands in concrete.
JLL's data for H1 2026 shows institutional real estate investment in India touching nearly $4.3 billion, up 23% year-on-year, with domestic institutional capital accounting for a record 64% share of that flow — roughly $2.8 billion, a jump of 165% over the previous year. Domestic private equity funds and REITs alone made up 72% of that domestic pool. This is not foreign money hunting yield. This is Indian capital, quietly and deliberately, choosing bricks over Dalal Street.
That's not a coincidence. It's a verdict. When the equity market feels punitively taxed and the central bank sits on its hands, capital doesn't vanish into thin air — it migrates to wherever it's treated with the least suspicion. Right now, that's office towers in Bengaluru and Delhi-NCR, not the exchange. A rigid Long-Term Capital Gains regime combined with a rate-hold RBI is, functionally, a joint government-and-central-bank incentive scheme for real estate over risk capital — probably not the intention, but very much the outcome.
🔹 The Tax Noose — merely holding the repo rate is lazy governance if the LTCG regime keeps making equities the least attractive place to park a rupee. A serious growth push needs a serious look at capital gains treatment, not just a monetary policy press conference every two months.
🔹 The Umbrella Fallacy — you cannot solve a geopolitical or fiscal-policy problem with an interest-rate lever alone. That's bringing an umbrella to a structural fight. The real job is telling supply shocks apart from demand shocks apart from tax-policy-induced capital flight, and treating each with the tool built for it.
🔹 The SumanSpeaks Hammer — if the tax noose stays tight on equities and the RBI stays rigid on rates, the money keeps finishing its journey in commercial towers instead of corporate balance sheets, and India's growth story stays starved of the risk capital it actually needs.
| Indicator | SumanSpeaks Read |
| M3 Growth | Robust, but not runaway — consistent with a formalising, expanding economy. |
| Velocity of Money | Steady to softening — money is parked, not sprinting. No demand-pull fire to fight. |
| Food Inflation | A supply-and-cash-economy story. Rate hikes are the wrong medicine for this ailment. |
| Growth Outlook | Trimmed to 6.6% for FY27. This is not an economy that needs the brakes tapped. |
| Rate Path, H2 FY27 | A cut is on the table if the monsoon and West Asia stay quiet. Data supports easing, not another hold. |
| Capital Rotation | Domestic institutional money is voting with its feet — into real estate, away from a taxed, tepid Dalal Street. |
🔥 |
The Final Gut Punch |
Inflation targeting was meant to be a discipline, not a straitjacket. Somewhere between the textbook and the trading floor, India's policy conversation began treating every tomato spike as a monetary emergency and every M3 print as a crime scene. Neither is true. The velocity of money tells a quieter, more honest story — one where liquidity is expanding in step with the economy, not racing ahead of it, and where the real inflation risk hides partly in a cash economy no repo rate hike will ever touch, and partly in a tax and policy regime that keeps pushing productive capital into bricks instead of businesses.
RBI held its nerve in June, and rightly so — caution amid a jittery Gulf and an unsettled monsoon is not weakness, it's professionalism. But if the data behaves the way the arithmetic suggests it will, the central bank should not need a second invitation to cut. And the finance ministry shouldn't need one either, on LTCG. Growth is not the enemy of stability. Growth, done right, is the only stability that actually pays anyone's bills — and right now, both the rate-setters and the tax-setters are asking Indian capital to be patient with a market they've made it rational to avoid.
India doesn't need a central bank chasing every onion price into a policy statement, or a tax code that keeps quietly nudging every investor toward concrete. It needs a policy stack that can tell the difference between a genuine fire and a kitchen full of steam — and then get out of the way of the money trying to do something productive with itself.
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