"Monetary policy is a blunt instrument against supply-side inflation." Critically examine with reference to India's flexible inflation targeting framework.

The Finance Act, 2016 amended the RBI Act, 1934 to adopt Flexible Inflation Targeting (FIT) [4]. Under FIT, the Monetary Policy Committee (MPC) must hold CPI inflation at 4%, within a 2–6% band [2]. When food and fuel shocks drive inflation, the policy rate does little to cut prices. However, it remains useful in keeping inflation from becoming entrenched.

Why monetary policy is blunt against supply shocks

• Limited traction: RBI's 2025 framework review notes that food and fuel inflation are volatile due to supply shocks and do not react to monetary policy in the way other prices do [4].
• High food weight: food makes up about 46% of India's CPI basket, the highest among inflation-targeting countries [4]. A weak monsoon can therefore lift headline inflation whatever the repo rate.
• Growth cost: a rate hike makes credit dearer across the whole economy, but it does not make diesel or vegetables cheaper.
• Hidden inflation: public sector OMCs did not raise pump prices from 6 April 2022 despite record crude prices [6]. The MPC does not control when such delayed price rises reach consumers.

Why it is not ineffective

• Anchoring expectations: if supply shocks persist, people start expecting higher inflation, which can trigger a wage–price spiral. A rate move signals that the MPC will defend its target.
• Pre-empting a breach: in October 2026 the MPC raised the repo rate by 25 bps to 5.50% while projecting Q3 inflation at 6.0% [1], which is exactly the upper tolerance limit [2].
• Headline mandate: RBI kept headline over core targeting, because leaving food out would ignore the cost of living of the poor [4]. Supply shocks therefore fall within the MPC's mandate.
• Second-round effects: higher fuel costs feed into transport and core prices. Monetary policy can limit this spillover.

Complementary tools

• Fiscal: the Centre cut excise duty on petrol and diesel in November 2021 to keep inflation low [5], and States can match this with VAT cuts.
• Supply management: releasing buffer stocks and adjusting trade policy. In the past, joint monetary and fiscal measures by the Government and RBI have contained inflation [7].

Monetary policy cannot cure supply-side inflation, but it can stop it from becoming entrenched. The best response is a measured rate "nudge" combined with fiscal and supply-side action by the Centre. Such coordination preserves the credibility of FIT and protects the purchasing power of the poorest, in line with SDG 1 and SDG 2.