"Monetary policy is a blunt instrument against supply-side inflation." Examine this in light of recent food and fuel price shocks in India.

Under Section 45ZA of the RBI Act, 1934, the RBI must keep CPI inflation at 4% ±2% [2]. In October 2026 Q2 inflation reached 4.9%, above the 4.7% the RBI had projected. The MPC raised the repo rate and moved to "calibrated tightening" [1]. The causes of this inflation are food and fuel, which shows how little a rate hike can do on its own.

Recent shocks: supply, not demand

• Food: El Niño and a deficient monsoon have pushed up food prices [1].
• Fuel: Military action in Iran resumed and crude prices rose again. India imports most of its oil, so this feeds into CPI and the rupee [1].
• The RBI projects inflation of 6% in Q3, the upper tolerance limit [1].

Why monetary policy is blunt here

• No effect on supply: A rate hike cannot produce rain or grain, and it cannot lower crude prices.
• Costs to growth: Higher EMIs fall on MSMEs and households even though they did not cause the shock [1].
• Hidden fuel risk: Oil marketing companies have not yet passed on higher crude prices. A late increase could push inflation beyond what the RBI's forecasts allow for [1].
• Accountability mismatch: If the band is breached for three consecutive quarters, the RBI must explain the failure. The supply levers, however, belong to the government [3].

Why it is still needed

• Anchoring expectations: Food and fuel make up over 50% of the CPI basket. Food inflation that lasts spreads into wages, rents and firms' mark-ups [2].
• This is why the RBI's 2025 review kept headline, not core, inflation as the target [2].
• Track record: Average inflation fell from 6.8% to 4.9% after Flexible Inflation Targeting began, and volatility also fell [2].

Government's role

• Fuel: Cut excise duty openly in the budget instead of holding prices down through OMC balance sheets [1].
• Food: Release buffer stocks through open market sales, and use stock limits and export curbs [4].
• Long term: Fund climate-resilient crops and irrigation so that El Niño hits food prices less.

Monetary policy cannot remove a supply shock. Its job is to stop the shock turning into a wage–price spiral. The rate hike should therefore work alongside fiscal and supply-side action, with the government doing most of the work. That coordination protects poorer households, who spend most on food and fuel, and keeps the 4% target credible.