India's Monetary Policy Normalization: Is the RBI Reverting to Pre-2020 Playbooks Amid Rupee Stability?

The Reserve Bank of India (RBI) has long navigated the delicate balance between inflation control and economic growth, with its monetary policy frameworks evolving significantly over the past decade. As global economic pressures mount and India's domestic landscape shifts, investors are scrutinizing whether the RBI is reverting to its pre-2020 tightening playbook to stabilize the rupee and anchor inflation expectations. A closer examination of policy instruments, inflation targeting, and currency management strategies reveals a nuanced approach that blends elements of historical frameworks with modern adaptability.

Pre-2020 Tightening: The Inflation-Targeting Era

Prior to 2020, the RBI operated under a formal flexible inflation targeting (FIT) framework, adopted in 2016, which set a CPI inflation target of 4% with a ±2% tolerance band, according to the Monetary policy framework in India. This marked a shift toward data-driven policy decisions, with the Monetary Policy Committee (MPC) using the repo rate as the primary tool to curb inflationary pressures. For instance, during periods of high inflation, the RBI raised the repo rate to reduce liquidity and cool demand-side pressures, as described in the Monetary policy framework in India. This approach was complemented by a focus on macroeconomic stability, with the central bank adjusting its stance between neutral and tightening based on growth-inflation trade-offs, as outlined in the Monetary policy framework in India.

The pre-2020 playbook emphasized predictability and transparency, with inflation forecasts and policy rate adjustments communicated through quarterly reviews. However, this framework faced challenges during the pandemic, as global supply shocks and domestic lockdowns disrupted traditional inflation dynamics, as noted in an NDTV Profit review.

2025 Normalization: A Hybrid Approach

In 2025, the RBI has adopted a more flexible stance, maintaining a neutral policy while retaining the 4% CPI inflation target, according to Amey Nale's analysis. The repo rate, which stood at 5.5% in October 2025, according to a Finnovate analysis, has seen a mix of hikes and cuts throughout the year, reflecting a balancing act between inflation control and growth support. For example, a 25-basis-point rate cut in February 2025 reduced the repo rate to 6.25% to address slowing domestic demand, according to a GharJunction timeline, while a subsequent hike to 7.00% in October 2025 countered persistent services-sector inflation, as shown by Freefincal (https://freefincal.com/rbi-repo-rate-history/). This dynamic approach contrasts with the pre-2020 era's more rigid adjustments, where rate changes were often gradual and less reactive to immediate global shocks, according to the GharJunction timeline.

The RBI's current strategy also incorporates a more hands-off approach to rupee stability. Under Governor Sanjay Malhotra, the central bank has allowed the currency to fluctuate more freely with market forces, diverging from the active foreign exchange interventions under his predecessor, as noted in the Finnovate analysis. This shift aims to enhance export competitiveness by permitting a controlled depreciation of the rupee, a point also raised in the Finnovate analysis, while the RBI remains prepared to counter speculative attacks through targeted interventions, according to Amey Nale's analysis.

Inflation Targeting: Evolution or Reversion?

While the 4% CPI target remains unchanged, the RBI's 2025 review of its FIT framework signals a potential evolution in methodology, as discussed in the NDTV Profit review. The central bank is now considering whether headline inflation or core inflation should guide policy decisions, and whether the ±2% tolerance band should be adjusted, points raised in the NDTV Profit review. This reflects a recognition of structural shifts in India's economy, such as the growing services sector's influence on inflation dynamics, noted in the GharJunction timeline.

Critics argue that the pre-2020 framework's rigidity limited the RBI's ability to respond to asymmetric shocks, such as the pandemic or geopolitical tensions, a critique echoed in the GharJunction timeline. In contrast, the 2025 normalization emphasizes flexibility, with the RBI prioritizing "policy flexibility" to address evolving conditions, a theme highlighted in the Finnovate analysis. For instance, the central bank revised its FY2026 inflation forecast downward to 2.6%, underscoring confidence in its ability to manage inflation despite global headwinds, according to Amey Nale's analysis.

Implications for Investors

For investors, the RBI's hybrid approach suggests a policy environment that is neither fully accommodative nor aggressively tightening. The neutral stance, combined with targeted rate adjustments, supports a stable macroeconomic backdrop for growth-oriented investments in sectors like manufacturing and services, as noted in the GharJunction timeline. However, the rupee's increased volatility-while beneficial for exporters-introduces currency risk for import-dependent industries, a point emphasized in the Finnovate analysis.

The RBI's ongoing review of its inflation targeting framework also carries long-term implications. If the central bank adopts a narrower focus on core inflation or adjusts the tolerance band, it could signal a shift toward more aggressive inflation control, potentially tightening financial conditions, as discussed in the NDTV Profit review. Conversely, a broader focus on headline inflation might prioritize growth support, aligning with the current neutral stance, according to Amey Nale's analysis.

Conclusion

The RBI's 2025 normalization efforts reflect a blend of pre-2020 principles and modern adaptability. While the 4% CPI target and repo rate adjustments echo historical frameworks, the central bank's flexible approach to rupee management and inflation targeting demonstrates a willingness to evolve. For investors, this hybrid strategy offers a stable yet dynamic environment, where policy responsiveness to global and domestic shocks will remain critical. As the RBI prepares for its next FIT review in March 2026, stakeholders must monitor how these evolving priorities shape India's monetary landscape.