UPSC Mains Examiner and Strategic Content Synthesizer. "RBI — Monetary Policy, Inflation Targeting & MPC". Indian Economy / Banking & Financial Sector. A set of chronological articles and editorials from April to June 2026. A cohesive "Strategic Summary" (3-4 paragraphs). Core Challenge $\rightarrow$ Government/Policy Response $\rightarrow$ Way Forward. HTML (,
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), no markdown blocks, raw HTML string. * *Article 1 (June 1):* Record dividend (₹2.87 lakh cr) to Govt. RBI sold forex to defend Rupee $\rightarrow$ exchange gains $\rightarrow$ OMOs to manage liquidity. Tension: Fiscal Dominance vs. Central Bank Prudence. * *Article 2 (June 1):* 'Growth-Inflation-Stability' trilemma. RBI deferring rate hikes despite supply-side inflation (West Asia conflict). Repo at 5.25%. Focus on core inflation vs. headline inflation. GDP projections falling (6.9% $\rightarrow$ 6.0%). * *Article 3 (May 25):* CRB reduced from 7.5% to 6.5% to boost dividend (additional ₹92k cr). Helps fiscal deficit target (4.3%). Risk: Dependency on non-tax revenue. * *Article 4 (April 30):* 'Double-sided squeeze'. CAD widening + Capital Account surplus collapse. 'Invisibles' failing. FPI reversals. Need for FDI and energy decoupling. * *Editorial 1 (June 8):* Rupee depreciation. Three schools: Economists (neglect), Market Wallahs (intervene), Moralists (austerity). "AI Gap" and "China+1" delays. Yield differential issue. * *Editorial 2 (June 1):* Polycrisis. WPI high vs. CPI low. "Blunt instrument risk" (Repo rate is for demand, not supply shocks). Forex conservation vs. stabilizing Rupee. * *Editorial 3 (May 27):* Dividend masks structural fiscal imbalances. Risk to institutional autonomy. * *Paragraph 1: The Core Challenge (The Macroeconomic Trilemma).* * Focus on the interplay between inflation, growth, and currency stability. * Mention the "Growth-Inflation-Stability" trilemma. * Highlight the supply-side shocks (West Asia, Strait of Hormuz, monsoon) causing a divergence between WPI and CPI. * Explain the "blunt instrument risk" (Repo rate limitations). * *Paragraph 2: Policy Responses & The "Double-Sided Squeeze".* * Discuss the RBI's dual-phase intervention: defending the Rupee (selling forex) and managing liquidity (OMOs). * Mention the "double-sided squeeze" (CAD widening and Capital Account collapse/FPI reversals). * Connect the monetary policy stance (wait-and-watch, repo at 5.25%) to the prioritization of growth amidst downward GDP revisions. * *Paragraph 3: Fiscal-Monetary Nexus & Institutional Risks.* * Analyze the record dividend (₹2.87 lakh cr) and the reduction of the Contingent Risk Buffer (CRB) to 6.5%. * Discuss "Fiscal Dominance" vs. "Central Bank Prudence." * The danger of using cyclical windfalls to meet fiscal deficit targets (4.3%) instead of structural tax reforms. * *Paragraph 4: The Way Forward (Strategic Reorientation).* * Shift from symptom management (forex reserves) to structural fixes. * Addressing the "AI Gap," implementing "China+1," and energy decoupling. * Moving from "hot money" (FPI) to stable FDI. * Balancing the Flexible Inflation Targeting (FIT) framework with external sector resilience. * *UPSC Tone:* Formal, analytical, balanced, using keywords like "polycrisis," "fiscal dominance," "structural vulnerabilities." * *Check Constraints:* HTML format? Yes. 3-4 paragraphs? Yes. Raw HTML? Yes. No markdown? Yes.
The Reserve Bank of India (RBI) is currently navigating a complex 'Growth-Inflation-Stability' trilemma, where traditional monetary tools are being tested by a 'polycrisis' of external geopolitical shocks and internal structural vulnerabilities. The core challenge lies in the 'blunt instrument risk': while the Monetary Policy Committee (MPC) maintains a 'wait-and-watch' stance with the repo rate at 5.25%, it faces a sharp divergence between Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation. This cost-push inflation, driven by supply-side disruptions in West Asia and the Strait of Hormuz, renders aggressive rate hikes ineffective for curbing prices and potentially detrimental to domestic growth, especially as GDP projections have been revised downward from 6.9% to 6.0%.

Simultaneously, the Indian economy is experiencing a 'double-sided squeeze' in the external sector, characterized by a widening Current Account Deficit (CAD) and a collapse in the Capital Account surplus. The traditional shock absorbers—namely 'invisibles' (remittances and services)—have weakened, while FPI reversals have highlighted a dangerous reliance on 'hot money.' The RBI's policy response has been a dual-phase intervention: selling $195 billion in forex reserves to defend the Rupee against depreciation, followed by Open Market Operations (OMOs) of ₹9 lakh crore to neutralize the resulting liquidity deficit in the banking system. However, this symptom-management approach is constrained by a narrowing India-US yield differential, making it difficult to attract stable capital through monetary policy alone.

This macroeconomic volatility has created a precarious Fiscal-Monetary nexus, exemplified by the record ₹2.87 lakh crore dividend transfer to the Central Government for FY26. To facilitate this windfall, the RBI reduced its Contingent Risk Buffer (CRB) from 7.5% to 6.5%, unlocking liquidity to help the government meet its fiscal deficit target of 4.3%. While this provides immediate relief for subsidy pressures and capital expenditure, it raises critical concerns regarding 'Fiscal Dominance'—where the government becomes structurally dependent on central bank surpluses rather than long-term tax reforms. Such a trend risks eroding the RBI's institutional autonomy and narrowing the central bank's safety margins against future systemic shocks.

The way forward requires a strategic pivot from temporary stabilization to structural reorientation. To ensure long-term macroeconomic resilience, India must focus on:

Reducing External Vulnerabilities: Pursuing energy decoupling to mitigate the impact of inelastic oil imports and shifting from FPI to stable, long-term FDI.

Closing the 'AI Gap': Upgrading the domestic technology ecosystem to maintain the competitiveness of services exports in the face of global AI disruptions.

Industrial Realignment: Accelerating the 'China+1' strategy to bolster manufacturing and improve the merchandise trade balance.

Fiscal Discipline: Transitioning from a reliance on cyclical RBI dividends toward sustainable revenue mobilization to avoid fiscal profligacy.

Ultimately, the sustainability of the Flexible Inflation Targeting (FIT) framework will depend on the government's ability to address these structural bottlenecks, allowing the RBI to focus on price stability without compromising economic growth.