The Inflation–Unemployment Puzzle: Why India Needs to Read Expectations When Jobs Cannot Tell the Whole Story.....

The Phillips Curve Meets the Reality of India's Informal Economy

The relationship between inflation and unemployment is traditionally explained through the Phillips Curve, which suggests that inflationary pressure tends to increase when unemployment falls and economic activity approaches its productive capacity. When more people find employment, household incomes rise, consumption increases and businesses gain greater pricing power. Conversely, rising unemployment generally weakens purchasing power, reduces consumption and moderates inflation. However, this relationship becomes considerably more complicated in India, where nearly 90% of employment is estimated to be informal. Unlike developed economies, where formal employment, wages and unemployment insurance provide relatively reliable indicators of economic conditions, India's labour market includes casual workers, self-employed individuals, agricultural labourers, unpaid family workers and people engaged in irregular employment. A person may be officially employed but earn insufficient income to support consumption, while another may be working fewer hours than desired. Consequently, a low unemployment rate does not necessarily indicate a tight labour market or strong aggregate demand. India's Periodic Labour Force Survey has reported unemployment of approximately 3.1% under the usual-status measure, while unemployment among young people aged 15–29 has been considerably higher, around 9.9%. Graduate unemployment has also remained a concern. These differences demonstrate why the headline unemployment rate cannot independently explain the relationship between inflation and economic activity. India's inflation problem must therefore be examined through employment quality, real wages, household purchasing power, underemployment and the distribution of income rather than simply the number of people classified as employed.

Why Unemployment Does Not Always Control Inflation

In an economy dominated by informal employment, inflation can remain elevated even when unemployment is relatively high. This happens because food, fuel, housing and essential services account for a substantial share of household expenditure, particularly among lower-income households. Rural households spend approximately 47% of their monthly consumption expenditure on food, compared with around 40% for urban households. Therefore, an increase in food prices can reduce disposable income and consumption of other goods without necessarily producing a corresponding increase in measured unemployment. Equally, higher prices can encourage workers to demand higher wages, but informal businesses may lack the financial capacity to increase wages proportionately. The result is a decline in real incomes rather than a conventional wage-price spiral. India's average daily earnings for casual labour increased from approximately ₹430 in 2024 to ₹453 in 2025, but nominal wage increases do not necessarily represent improvements in purchasing power when essential prices rise. Furthermore, self-employed workers may respond to declining demand by accepting lower margins, working longer hours or employing family members without additional compensation. These adjustments conceal economic distress in conventional labour statistics. Thus, unemployment may not increase even when household consumption weakens significantly. The relationship between inflation and unemployment in India is therefore mediated by real wages, informal employment, productivity and the capacity of businesses to pass higher costs to consumers.

How the RBI Distinguishes Transitory Inflation from Embedded Inflation

The Reserve Bank of India cannot depend exclusively on unemployment figures to determine whether inflation is temporary or becoming entrenched. Instead, it must examine the composition, persistence and transmission of price increases. India's flexible inflation-targeting framework aims at 4% consumer price inflation, with a tolerance band of 2–6%. A temporary increase in vegetable prices caused by an adverse monsoon, supply disruption or seasonal shortage does not necessarily justify a monetary tightening cycle. The RBI must assess whether such increases are spreading into other goods and services, influencing wages, changing business pricing decisions and altering household expectations. Food inflation is particularly important because food occupies a large share of household budgets and influences perceptions of the cost of living. However, the persistence of core inflation, which excludes food and fuel, can provide additional evidence of broader price pressures. The RBI also examines the breadth of inflation across consumption categories, inflation momentum, input costs, capacity utilisation, credit growth, liquidity conditions, wage movements and international commodity prices. If headline inflation rises because of a temporary supply shock while core inflation remains contained and demand is weak, the appropriate response may be to avoid unnecessary interest-rate increases. But if businesses repeatedly revise prices upwards, workers begin demanding compensation for anticipated inflation and households expect prices to continue rising, a temporary shock can become embedded in the economy. The distinction is not simply between food inflation and core inflation; it is between an isolated change in relative prices and a persistent change in the economy's price-setting behaviour.

Inflation Expectations May Be More Informative Than Unemployment

When unemployment statistics are unreliable indicators of economic slack, inflation expectations become particularly important for monetary policy. The RBI conducts household inflation expectation surveys to understand what consumers expect prices to do over the coming three months and one year. It also conducts consumer confidence surveys, professional forecaster surveys, industrial outlook surveys and capacity utilisation assessments. These indicators help identify whether inflation is changing actual economic behaviour. For instance, if households expect higher prices, they may advance purchases, reduce savings and increase present consumption. Businesses anticipating higher future costs may increase prices today, even before their input costs rise. Workers may seek higher wages to protect purchasing power, while lenders may demand higher interest rates to compensate for expected inflation. Such behaviour can make inflation self-reinforcing. The distinction between adaptive and forward-looking expectations is important here. Adaptive expectations are formed largely from past inflation, whereas rational or forward-looking expectations incorporate available information about future economic conditions and policy responses. In practice, households and businesses use a combination of both. If the RBI credibly communicates that temporary supply shocks will not be allowed to become persistent inflation, it can influence future price-setting decisions without necessarily causing a large increase in unemployment. This is particularly valuable in India, where raising interest rates cannot directly create additional food supplies or immediately improve agricultural productivity.

Interest Rates, Savings and the Supply-Side Response

The relationship between interest rates, savings, consumption and inflation is more complex than simply reducing demand through expensive borrowing. Higher interest rates can encourage households to save rather than consume, moderate credit-financed expenditure and reduce excessive demand. They can also strengthen the incentive for financial savings, improving the availability of funds for productive investment. However, higher borrowing costs can simultaneously discourage businesses from expanding capacity, increasing inventories or investing in new production. If supply is already constrained, excessive monetary tightening may reduce production and employment without proportionately reducing inflation. The RBI must therefore distinguish demand-driven inflation from supply-driven inflation and assess how monetary policy can influence their interaction. An economy with weak purchasing power, considerable underemployment and limited wage growth may not require aggressive demand suppression simply because food inflation has temporarily increased. Instead, monetary policy should prevent temporary price increases from changing long-term inflation expectations, while fiscal and supply-side policies improve storage, transportation, agricultural productivity and market availability. The objective should be to encourage savings, stabilise expectations and create conditions in which businesses can increase supply without anticipating continuously rising prices. Lower expected inflation can also reduce the nominal interest rates demanded by lenders over time, improving investment conditions and supporting employment.

The RBI's Real Challenge: Controlling Expectations Without Destroying Employment

India needs a monetary-policy framework that recognises the limitations of conventional unemployment statistics. The RBI should not interpret low unemployment as conclusive evidence of excessive demand, nor should it interpret weak employment conditions as proof that inflation will automatically decline. A better assessment combines real wage growth, household consumption, labour-force participation, employment quality, capacity utilisation, credit expansion, core inflation and inflation expectations. The September 2026 CPI inflation rate of 5.54%, with food inflation at 7.74%, illustrates why the composition of inflation matters as much as the headline number. At the same time, the 2025 PLFS unemployment rate of 3.1% among persons aged 15 and above does not establish that all sections of the labour market enjoy adequate employment or purchasing power. The RBI's ultimate responsibility is not to eliminate every temporary movement in prices through interest-rate changes, but to prevent such movements from becoming permanent expectations. Monetary credibility can reduce the incentive to purchase today merely because prices are expected to be higher tomorrow. This can moderate present demand, encourage savings and give producers greater confidence to invest in additional capacity. India's monetary-policy success should therefore be judged not merely by whether inflation returns to the 4% target or unemployment remains low, but by whether stable expectations allow real incomes, productive investment, employment and supply to grow together. In an informal economy, the most important signal may not be how many people are unemployed, but what households and businesses believe will happen to their incomes, prices and borrowing costs tomorrow.

Inflation Expectations, Savings and Supply-Side Adjustment: Understanding the RBI’s Restrictive Monetary Policy.....

Introduction

Inflation expectations cannot be understood independently of the supply side of an economy. Inflation is not merely a consequence of excessive demand; it is also influenced by the willingness and ability of producers to supply goods, the cost of financing production, the availability of savings, and expectations about future prices. When households and businesses expect prices to rise, households may advance consumption to avoid paying more later, while businesses may postpone investment, retain inventories or increase prices in anticipation of higher replacement costs. This can simultaneously increase present demand and constrain effective supply. Monetary policy must therefore influence both sides of the economic equation. The central argument is that higher interest rates and increased savings can moderate consumption, improve the availability of financial resources for investment, and gradually reduce the expected rate of future price increases. The observation presented here is best classified as rational expectations with an important adaptive component, because it explains how economic agents respond not only to past inflation but also to anticipated policy actions and their consequences for future production and prices.

Adaptive or Rational Expectations?

Adaptive expectations are formed largely by adjusting previous expectations in response to observed outcomes. If inflation was 5 per cent last year and rises to 6 per cent this year, households may revise their expectations upwards because they extrapolate recent experience. Rational expectations, in contrast, incorporate available information about future economic conditions, government policies, monetary policy, production costs and the likely responses of other economic participants. The distinction is important because your observation goes beyond the backward-looking adjustment of inflation expectations. It identifies a relationship between expected prices, consumption, savings, interest rates and future supply. For example, if households anticipate that the Reserve Bank of India will maintain higher interest rates to prevent inflation from becoming persistent, they may reconsider immediate consumption and increase savings. Businesses may also revise their pricing decisions if they believe that demand will moderate and that future inflation will be lower. These decisions are forward-looking and therefore consistent with rational expectations. However, adaptive expectations remain relevant because households also use recent food, fuel and other essential commodity prices when forming their beliefs. Thus, the observation represents a rational-expectations framework operating in an economy where adaptive behaviour continues to influence individual decisions.

How Higher Inflation Expectations Affect Demand and Supply

Higher inflation expectations can create a self-reinforcing cycle. Households expecting higher prices may bring forward purchases, particularly of durable goods, housing and other products that can be bought in advance. This increases current demand. Businesses, meanwhile, may expect higher input costs, wages and replacement costs, encouraging them to increase selling prices or hold inventories rather than release them immediately. Investment decisions may also become uncertain when producers cannot distinguish between genuine increases in demand and temporary inflationary pressures. Consequently, the economy can experience rising demand alongside constrained effective supply. India provides an important illustration of this problem because food has a substantial weight in household expenditure, particularly among lower-income families. Food price increases can influence wage demands, household purchasing decisions and the pricing behaviour of businesses even when the original shock arises from weather conditions or agricultural supply disruptions. Inflation expectations therefore cannot be controlled simply by examining aggregate demand. The credibility of future supply, the availability of essential commodities and the ability of producers to expand output are equally important.

Savings as an Instrument of Disinflation and Supply Expansion

Higher interest rates encourage households to postpone some consumption and increase financial savings, provided that deposit returns become sufficiently attractive relative to expected inflation. This reduces immediate demand while strengthening the deposit base of banks. Banks can use additional deposits to support working capital, infrastructure, manufacturing and other productive investments, although the actual expansion of credit depends on borrowers' demand, creditworthiness and banks' risk appetite. This creates an important distinction between savings as a means of restraining consumption and savings as a source of financing future supply. Both effects can contribute to disinflation. When demand becomes more moderate, producers face less pressure to increase prices. When savings finance productive capacity, the economy gains the ability to meet future demand without equivalent price increases. Higher savings can therefore create monetary and financial room for a gradual expansion of supply, lower inflation expectations and employment generation. However, the process is not automatic: excessively high borrowing costs can discourage investment, increase production costs and reduce employment. The objective should be to encourage productive savings without suppressing the investment necessary to expand output.

The RBI’s Restrictive Stance and the Change in Expectations

The RBI's October 2026 monetary policy decision provides an important example of how monetary policy attempts to change expectations before inflation becomes entrenched. The Monetary Policy Committee increased the repo rate by 25 basis points, from 5.25 per cent to 5.50 per cent, and shifted its stance from neutral to calibrated tightening. This was particularly significant because the RBI simultaneously raised its FY2026–27 real GDP growth forecast from 6.7 per cent to 7.1 per cent and its CPI inflation forecast from 5 per cent to 5.2 per cent. CPI inflation had increased from 4.5 per cent in July to 4.8 per cent in August 2026, while the RBI projected inflation of 6 per cent in the third quarter. The decision therefore reflected concern about the possibility that supply-side inflation could spread into general price-setting behaviour. The RBI recognised that monetary policy cannot directly produce food, reduce international crude prices or reverse weather-related supply disruptions. Its primary responsibility is to prevent these shocks from generating persistent second-round effects through inflation expectations, wage demands and business pricing decisions. The restrictive stance communicated that interest-rate cuts were no longer the immediate policy direction and that subsequent action could involve either another increase or a pause, depending on economic developments. This communication itself becomes an instrument of monetary policy because households, investors, banks and businesses begin adjusting their expectations about future borrowing costs, consumption and prices.

From Higher Interest Rates to Lower Price Expectations

The most important transmission mechanism of restrictive monetary policy is not necessarily the immediate reduction in consumption but the change in expectations about the future cost of money and the future availability of goods. When the RBI signals that borrowing costs may remain elevated, households become more cautious about financing consumption through credit. Businesses reassess investment projects, inventories and their ability to pass higher input costs to consumers. Banks may offer more attractive deposit returns, encouraging households to save rather than spend immediately. These developments can moderate aggregate demand and reduce the ability of businesses to increase prices without losing customers. However, the more significant long-term effect is that producers begin to anticipate a more stable price environment. If businesses expect lower future inflation, they may have less incentive to increase prices pre-emptively, while workers may moderate wage demands based on more realistic expectations of purchasing-power losses. This is how a temporary supply shock can be prevented from becoming persistent inflation. The process also requires credibility: if households believe that the RBI will reverse its restrictive stance too early, inflation expectations may remain elevated despite an increase in the repo rate. Conversely, credible communication can influence expectations even before the full effect of higher interest rates appears in consumption and investment data.

The Supply-Side Opportunity: Increasing Output and Employment

The ultimate objective of controlling inflation should not be to suppress demand indefinitely but to create conditions in which supply can expand sufficiently to meet demand at relatively stable prices. Savings are important in this transition because they provide banks with financial resources to support productive investment. India’s projected real GDP growth of 7.1 per cent in FY2026–27 indicates that the economy has the potential to expand even while monetary policy becomes more restrictive. Nevertheless, the quality of this expansion matters. Credit should support manufacturing, agricultural infrastructure, logistics, energy, housing and small enterprises rather than merely finance consumption or speculative asset purchases. Increased productive capacity can reduce unit costs, improve the availability of goods and generate employment. There is, however, a policy trade-off: excessive monetary tightening can increase the cost of working capital, discourage private investment and reduce hiring. Therefore, the RBI must distinguish between demand-driven inflation and inflation originating from supply constraints. Monetary restraint should be sufficient to prevent second-round effects without unnecessarily weakening the productive capacity needed to resolve the original supply problem. Fiscal policy and structural reforms must complement monetary policy through infrastructure, agricultural productivity, storage facilities, competition and skill development.

Conclusion

The observation is fundamentally rooted in rational expectations because it considers how economic agents anticipate the consequences of monetary policy, interest rates, savings and future supply rather than simply extrapolating past inflation. Adaptive expectations explain why previous price increases continue to influence present behaviour, but rational expectations explain how credible policy can change that behaviour. The RBI's restrictive stance is therefore not merely an attempt to reduce present consumption; it is an attempt to change the economic incentives governing future consumption, savings, production and pricing decisions. The most desirable outcome is a cycle in which higher savings moderate excessive demand, productive investment expands supply, increased output creates employment and improved availability of goods reduces price expectations. The real success of monetary tightening should ultimately be measured not by how much demand it destroys, but by how effectively it changes expectations to make higher supply, lower inflation and greater employment possible. 

Why Trading in the Stock Market Requires Low Market liquidity and Capitalisation…..

Introduction: The Market Is Not Just About Prices, but About Who Can Wait

The stock market is often described as a place where buyers and sellers discover the fair value of a company. However, the price at which a stock trades is not determined by its intrinsic value alone. It is also influenced by the time horizon, urgency, bargaining power and expectations of market participants. Traders and long-term investors may look at the same company but operate with fundamentally different strategies. Traders seek to anticipate surprises, react before information is fully reflected in prices and exit before the market changes direction. Long-term investors, on the other hand, can afford to wait for their expectations to materialise. This difference creates an important asymmetry: the trader may have greater urgency, but the investor may have greater bargaining power. An investor who has conviction about a company's future value and does not need immediate liquidity can refuse to sell at an unfavourable price. The central question, therefore, is not simply whether a stock will rise or fall, but who has the patience and willingness to determine the price at which a transaction takes place.

Traders and Investors: Two Different Clocks in One Market

A trader's advantage generally comes from speed, information processing and the ability to identify short-term price movements. Traders watch earnings announcements, government policies, corporate developments, global markets and unexpected events because a surprise can create an immediate price adjustment. Their challenge is that they must often act before the market fully absorbs the information. A long-term investor operates differently. Instead of predicting every daily movement, the investor estimates what a company could be worth over three, five or ten years. If the expected value is significantly higher than the current market price, the investor may be willing to hold through temporary volatility. This creates a difference in bargaining power. A trader who must close a position quickly may accept a lower selling price, whereas an investor who has no immediate need to sell can withdraw the offer altogether. The investor's ability to wait becomes an economic advantage, although it does not guarantee that the investment thesis will be correct.

The Importance of Scarcity: When Buyers Compete for Limited Shares

Consider a company with 100 shares available for trading on a particular day. If a large number of buyers want to acquire those shares but existing shareholders are unwilling to sell, competition among buyers can push the price upwards. Suppose the last traded price is ₹100, but buyers believe the stock could eventually reach ₹150. Some may submit purchase orders at ₹105, ₹110 or ₹120 to improve their chances of obtaining shares. If sellers remain unwilling to accept these prices, the stock may experience a sharp upward movement as buyers compete for limited supply. This is particularly important in companies with low free-float shares, where a relatively small number of shares are actually available for public trading. However, it is essential to distinguish between the total outstanding shares of a company and its effective market supply. A company may have millions of outstanding shares, but if only a small proportion is actively traded, even moderate buying demand can produce a disproportionate price movement. Thus, market capitalisation alone cannot explain price behaviour; free float, trading volume and the willingness of existing shareholders to sell are equally important.

Limit Prices: Investors Must Know What They Are Willing to Pay

An investor should ideally have an independent estimate of the price at which a stock represents an attractive investment. This estimate should be based on expected earnings, cash flows, growth opportunities, competitive advantages, debt and the valuation the market may assign to the company in the future. For example, if an investor believes that a company's shares could reasonably reach ₹200 over three years, purchasing at ₹100 may offer an attractive opportunity, while purchasing at ₹190 may leave little margin of safety. The investor should therefore establish a buying range and a selling expectation rather than simply following the latest traded price. A limit order allows the investor to specify the maximum purchase price or minimum selling price acceptable. The discipline is important because market quotations are not necessarily expressions of intrinsic value. They represent the prices at which participants are currently willing to transact. Investors who continuously revise their expectations according to short-term market movements risk surrendering their independent judgement to the crowd.

Price Discovery: Where Supply Meets Demand

In a stock exchange, the market price emerges from the interaction of outstanding buy and sell orders. In a continuous trading system, transactions occur when compatible bids and offers meet, while the best available bid and ask determine the immediate trading opportunity. The price at which supply and demand balance is therefore not necessarily the price that every investor considers fair. It is the price at which a willing buyer and a willing seller agree to transact. Consider a stock trading at ₹100. If buyers are willing to pay ₹110 but sellers are demanding ₹120, no transaction necessarily takes place until one side adjusts its quotation. If more buyers gradually increase their bids while sellers maintain their asking prices, the market can move upwards. This is where the distinction between a price maker, a price taker and a price breaker becomes useful. A price maker places orders that contribute to setting the available market price, particularly through limit orders. A price taker accepts an existing market quotation and executes against available liquidity. A price breaker, in the broader descriptive sense, is a participant whose large order or aggressive bidding disrupts the existing price equilibrium. These are useful descriptions of market behaviour, rather than three formally defined categories of exchange participants. The important point is that an investor who is prepared to wait can choose the price at which to participate, whereas an impatient trader may have to accept the price offered by the market.

The Majority Effect: Why Collective Expectations Can Move Prices

Stock prices are also influenced by the collective expectations of market participants. If a large number of investors independently believe that a company is undervalued at ₹100 and expect it to reach ₹150, their willingness to hold rather than sell at ₹110 can reduce the supply available to short-term buyers. If demand continues to rise, successive transactions may take place at increasingly higher prices. This creates a feedback mechanism in which expectations influence demand, demand influences prices and rising prices sometimes reinforce the original expectations. However, the majority does not mechanically decide the price through a voting system. A transaction requires a buyer and seller, and the marginal orders that actually meet determine the traded price. Moreover, a high quoted price does not automatically become the market price merely because many investors display optimism. It must attract executable buying interest. This distinction is essential because the displayed order book represents intentions, not necessarily completed transactions. Investors should therefore examine actual trading volumes, delivery quantities, bid-ask spreads and the depth of available orders rather than interpreting a few unusually high quotations as proof of genuine demand.

Small-Cap and Micro-Cap Stocks: The Power of Limited Supply

The relationship between investor patience and market liquidity becomes particularly visible in small-cap and micro-cap stocks. Unlike large companies with extensive institutional ownership and substantial daily trading volumes, many smaller companies have limited public float and relatively thin order books. A comparatively small amount of additional buying can therefore produce a substantial price movement. India's growing retail participation makes this phenomenon particularly relevant. SEBI's study of individual investors in the equity cash market found that the number of individuals participating in intraday trading increased from approximately 15 lakh in FY2019 to 69 lakh in FY2023, a 4.6-fold increase. Around one-third of individual equity cash-market participants traded intraday in the period studied. Such participation creates an environment in which short-term liquidity and long-term ownership decisions can interact strongly. A small-cap company with limited available shares may experience a sudden rise when positive news attracts buyers, particularly if existing shareholders are unwilling to sell. However, the same limited liquidity can create severe downward movements when investors attempt to exit simultaneously. A stock that is easy to buy during an upper circuit may become extremely difficult to sell during a lower circuit. Limited supply can amplify gains, but limited demand can amplify losses as well.

Upper Circuits: When Buyers Want More Than Sellers Offer

Indian exchanges use price bands to restrict the maximum permissible daily movement in specified securities. These bands can be 2%, 5%, 10% or 20%, depending on the security and exchange surveillance framework. For example, if a stock closes at ₹100 and has a 5% upper price band, its maximum permitted price for the next trading session is ₹105. If buyers continue placing orders at ₹105 but existing shareholders are unwilling to sell, a queue of unexecuted buy orders may accumulate at the upper circuit. The stock can then appear to have enormous buying strength even though very few shares are actually changing hands. The NSE's October 2026 price-band revision covered 3,561 securities, including 42 in the 2% category, 566 in the 5% category, 204 in the 10% category and 2,203 in the 20% category, alongside securities in other categories. This demonstrates that price restrictions are applied across different securities rather than being a universal rule that every small-cap or micro-cap stock has a 2% or 5% limit. The applicable band must be checked for each individual security. Importantly, reaching an upper circuit does not establish that the company's intrinsic value has increased by the same percentage. It indicates that buying pressure has reached the maximum permitted daily price in the presence of insufficient selling interest.

The Price-Making Advantage: Patience Versus Urgency

The most important distinction between investors and traders is that one can often choose when to transact, while the other may be compelled to transact within a limited period. A trader operating with leverage, margin requirements or a short-term strategy may face pressure to exit even when the underlying investment opportunity remains attractive. A long-term investor using unleveraged capital has greater flexibility to wait. This flexibility can influence market prices, particularly when a significant proportion of shareholders share similar expectations. If investors collectively establish higher reservation prices, the available supply at lower prices declines. Buyers must then increase their bids to attract sellers. In this sense, investors can influence the price-discovery process without necessarily buying more shares every day. Their decision not to sell is itself economically significant. Nevertheless, patience is not an unlimited advantage. Companies can lose competitiveness, management quality can deteriorate, debt can become unsustainable and capital can remain unproductive for years. The ability to hold a stock indefinitely is useful only when the underlying investment thesis remains credible.

Information Advantage Versus Bargaining Advantage

Traders generally attempt to earn returns from information that has not yet been fully incorporated into market prices. Their strategy depends on identifying an event earlier than other participants or interpreting its consequences more accurately. Investors, however, can benefit from a different advantage: the ability to establish a valuation independently of daily market sentiment. For example, if a company generates earnings per share of ₹10 and an investor expects earnings to grow to ₹20 over five years, the investor can estimate an appropriate future valuation using an expected price-to-earnings multiple. At a future multiple of 20, the implied share price would be ₹400. If the current price is ₹200, the potential appreciation is substantial, although it depends on earnings actually doubling and the market maintaining the assumed valuation. The investor can use this estimate to determine an appropriate entry price rather than chasing every upward movement. This is particularly important when short-term traders are reacting to news that may have limited significance for the company's long-term earnings capacity. The best investment decisions often emerge when an investor separates the value of information from the urgency of acting upon it.

Making the Stock Market More Predictable

A more predictable stock market does not necessarily mean eliminating volatility or ensuring that prices move in a straight line. It means improving the relationship between market prices, available information, corporate fundamentals and genuine demand. Better disclosures, transparent promoter ownership, reliable earnings reporting, adequate public float, stronger surveillance against price manipulation and improved liquidity can all contribute to more meaningful price discovery. Investors should also distinguish between genuine accumulation and artificial demand created through coordinated buying, misleading information or thin trading volumes. Exchanges can improve transparency by making order-book depth, delivery data and surveillance classifications accessible. Investors, meanwhile, should establish valuation ranges, expected holding periods and exit conditions before entering positions. These practices reduce the possibility of confusing a temporary shortage of sellers with a permanent improvement in business value.

Conclusion: The Person Who Can Wait Can Influence the Price

Ultimately, the stock market is not merely a contest between buyers and sellers; it is also a contest between different time horizons. Traders seek to anticipate what the market will discover tomorrow, while investors attempt to estimate what a company will be worth several years from now. The trader's strength lies in speed and information, whereas the investor's strength lies in patience, valuation discipline and the freedom to reject an unattractive quotation. When investors are convinced about a company's future and refuse to sell cheaply, they can reduce the effective supply of shares and force competing buyers to offer higher prices. But higher quotations become sustainable only when supported by genuine demand and improving business fundamentals. The most successful investor, therefore, is not necessarily the person who predicts every market movement, but the person who knows what a stock is worth, what price is worth paying and when there is no reason to transact. In a market where everyone is competing to act first, the ability to wait for the right price can itself become a source of bargaining power.

Food Subsidy, Fiscal Consolidation and Poverty in India: The Changing Burden on Public Finances.....

Introduction: The Fiscal Cost of Food Security

Food subsidy is one of India's largest social-sector expenditures and an important instrument for protecting household purchasing power, reducing hunger and maintaining food security. However, its economic significance extends beyond the amount allocated in the Union Budget. It raises a broader question: as poverty declines, should the food subsidy bill also decline proportionately, and can the government reduce this expenditure while simultaneously pursuing lower fiscal deficits? India's experience over the last 12 years suggests that the relationship between poverty reduction and food subsidy expenditure is not straightforward. Although poverty estimates have improved, food subsidy remains a substantial fiscal commitment because it covers a large population, provides subsidised foodgrains under the National Food Security Act (NFSA), and absorbs the costs of procurement, storage, transportation and distribution. The challenge is therefore not simply to reduce subsidies, but to understand whether the burden is reaching those who need it, whether its fiscal structure is sustainable, and how much additional public expenditure could be directed towards education, healthcare and human-capital development.

Food Subsidy Over the Last 12 Years: A Substantial Fiscal Commitment

India's food subsidy expenditure has undergone significant changes since 2014–15. The subsidy bill increased from approximately ₹1.14 lakh crore in 2014–15 to around ₹2.87 lakh crore in 2019–20, before rising sharply during the pandemic and reaching approximately ₹5.41 lakh crore in 2020–21. The increase reflected emergency food-security requirements, the expansion of free foodgrain distribution and the government's efforts to protect vulnerable households during the economic disruption. Expenditure subsequently remained elevated, reaching approximately ₹5.41 lakh crore in 2021–22 and ₹2.72 lakh crore in 2022–23, before declining to around ₹2.12 lakh crore in 2023–24 and approximately ₹2.05 lakh crore in 2024–25. The decline largely reflected the withdrawal of pandemic-era additional allocations and adjustments in the subsidy accounting and foodgrain distribution arrangements. Nevertheless, the expenditure remains considerably higher than its pre-pandemic level. This history demonstrates that food subsidy is influenced not only by poverty but also by foodgrain procurement prices, distribution quantities, buffer-stock requirements, administrative costs and exceptional economic circumstances.

The 2026–27 Budget: Food Subsidy and the Tax Revenue Constraint

The Union Budget 2026–27 allocates approximately ₹2.27 lakh crore for food subsidy under PMGKAY, while the overall allocation to the Department of Food and Public Distribution is ₹2.35 lakh crore. The food subsidy allocation is almost unchanged from the 2025–26 revised estimate of ₹2.28 lakh crore, indicating that the government is attempting to contain this expenditure rather than substantially expand it. There is, however, an important distinction in the tax revenue figures: ₹26.7 lakh crore is the Centre's net tax revenue in the revised estimates for 2025–26, whereas the budgeted net tax revenue for 2026–27 is ₹28.7 lakh crore. Consequently, food subsidy represents approximately 8.5% of the former and 7.9% of the latter. In other words, the 8.5% calculation is valid when using the ₹26.7 lakh crore figure, but the correct comparison for the 2026–27 Budget is approximately 7.9%. The food subsidy allocation is also estimated at around 0.6% of GDP. Meanwhile, the fiscal deficit target has been reduced from 4.4% of GDP in 2025–26 to 4.3% in 2026–27. This creates a continuing fiscal trade-off: the government must preserve a large food-security commitment while reducing borrowing and maintaining resources for infrastructure, education, healthcare and other development priorities.

India's Poverty Position: What the Numbers Actually Tell Us

The case for reassessing food subsidy expenditure becomes stronger when viewed against India's poverty reduction. According to the World Bank's June 2025 poverty estimates, extreme poverty declined from 16.2% of the population in 2011–12 to 2.3% in 2022–23, using the earlier international poverty threshold of $2.15 per person per day in 2017 purchasing-power-parity terms and revised consumption methodology. Rural extreme poverty declined from 18.4% to 2.8%, while urban extreme poverty fell from 10.7% to 1.1%. These estimates represent a substantial improvement in measured living standards, although they should not be interpreted as evidence that deprivation has disappeared. The World Bank also revised its international poverty lines in 2025, adopting a new extreme-poverty threshold of $3.00 per person per day in 2021 PPP terms. Comparisons across poverty estimates must therefore account for the poverty line and methodology being used. India's multidimensional poverty estimates have also shown substantial improvement, reflecting progress in sanitation, housing, electricity, cooking fuel, education and other indicators. Nevertheless, poverty is not a single condition. A household may move above the extreme-poverty threshold but remain vulnerable to food-price increases, unemployment, illness, irregular earnings and inadequate nutrition. The distinction between extreme poverty and economic vulnerability is central to deciding how quickly food subsidies can be rationalised.

Why Lower Poverty Has Not Automatically Reduced Food Subsidy

An important structural issue is that India's food subsidy system is not directly linked to annually measured poverty. Under the National Food Security Act, 2013, coverage is designed for up to 75% of the rural population and 50% of the urban population. The government currently provides free foodgrains to approximately 80.6 crore identified beneficiaries, against a maximum coverage of approximately 81.35 crore based on the 2011 Census. This means that even if extreme poverty falls substantially, the number of beneficiaries does not automatically decline. The programme is based on legally defined population coverage and household identification rather than an annually updated poverty assessment. Furthermore, the free distribution of foodgrains, extended for five years from January 2024 and subsequently continued through 2029, has created a continuing fiscal commitment. There are approximately 2.3 crore Antyodaya Anna Yojana households and 18.3 crore priority households. The former receive 35 kg of foodgrains per household per month, while the latter receive 5 kg per person per month. Thus, the programme serves not only people classified as extremely poor but also a much wider population whose incomes may be insufficient to guarantee food security. The policy question is whether the present coverage continues to reflect the distribution of economic vulnerability in India, particularly when population growth, migration, urbanisation and changes in household consumption have made the 2011 population base increasingly outdated.

Where Is the Actual Burden of Food Subsidy Going?

The direction of the food subsidy burden is determined by more than the number of poor households. The government purchases wheat and rice from farmers at the Minimum Support Price, incurs transportation and storage costs, maintains buffer stocks and distributes foodgrains free of cost to beneficiaries. The difference between the economic cost of these operations and the recovery from beneficiaries is borne by the government. Since the beneficiary price is now zero, the procurement and distribution expenditure largely translates into a fiscal subsidy. Procurement prices, storage efficiency, transportation distances, wastage, stock management and the concentration of procurement in a few states therefore influence the final bill. According to the parliamentary analysis of the 2026–27 Budget, 92% of wheat procurement comes from just three states, while 65% of paddy procurement comes from five states. This concentration has implications for transportation costs, regional agricultural incentives and the efficiency of the public distribution system. The estimated cost of providing free foodgrains for five years is approximately ₹12 lakh crore. Consequently, even if poverty continues to decline, the subsidy may not fall proportionately unless the procurement-distribution system becomes more efficient and beneficiary coverage is periodically reviewed. The historical experience also shows why expenditure figures must be interpreted carefully: food subsidy expenditure reached approximately ₹5.41 lakh crore in 2020–21, partly because the government cleared accumulated Food Corporation of India dues and financed additional pandemic foodgrain distribution. This was an exceptional fiscal year rather than a normal annual expenditure trend.

The Fiscal Deficit Target and the Opportunity Cost of Subsidies

India's fiscal consolidation creates an important opportunity-cost question. The fiscal deficit target of 4.3% of GDP for 2026–27 is part of a broader strategy to reduce government borrowing and gradually bring down the debt-to-GDP ratio. However, a lower fiscal deficit does not necessarily mean that social expenditure must decline. It means that expenditure must increasingly be prioritised according to its economic and social returns. Food subsidy provides immediate protection against hunger and helps households retain income for other consumption. Yet, spending on education and healthcare can generate longer-term improvements in productivity, employability, labour-force participation and household income. The distinction is particularly important for a country where food accounts for a substantial proportion of household consumption expenditure, especially among lower-income rural and urban families. If food subsidies are reduced without corresponding improvements in wages, employment and access to affordable nutrition, households could face greater vulnerability. Conversely, if expenditure remains locked into an inefficient procurement and distribution structure, the government may have less fiscal flexibility to expand school infrastructure, improve public hospitals, strengthen primary healthcare and invest in skill development. Food subsidy must therefore be evaluated alongside the broader composition of expenditure rather than treated as an isolated budgetary burden.

Can Food Subsidy Savings Strengthen Education and Healthcare?

The opportunity cost becomes clearer when we consider the scale of India's human-capital requirements. The 2026–27 Union Budget allocates approximately ₹1.39 lakh crore to the Ministry of Education and around ₹1.05 lakh crore to the Ministry of Health and Family Welfare. Together, these allocations are approximately ₹2.44 lakh crore, only slightly higher than the ₹2.27 lakh crore food subsidy allocation. This comparison illustrates the enormous scale of India's food-security commitment relative to two essential development sectors. It does not mean that food subsidy should simply be transferred to education and healthcare: the three expenditures address different needs, and the food subsidy also protects the nutritional foundation necessary for learning and health. Nevertheless, even a 10% efficiency saving on the food subsidy allocation would release approximately ₹22,700 crore annually. Such resources could support additional investment in primary healthcare centres, medical infrastructure, teacher recruitment, school quality, nutrition programmes and vocational education. The key is to generate savings through better targeting, reduced wastage, improved storage and transportation, digitised beneficiary records and more efficient procurement, rather than through arbitrary cuts in food entitlements.

The Meaning of 2.5% and the Need for Better Fiscal Priorities

The percentage used to measure food subsidy needs to be interpreted carefully. Against the Centre's 2026–27 net tax revenue of ₹28.7 lakh crore, the ₹2.27 lakh crore food subsidy bill represents approximately 7.9%, not 2.5%. Against the ₹26.7 lakh crore revised net tax revenue for 2025–26, it represents approximately 8.5%. The distinction matters because net tax revenue is the amount retained by the Centre after devolution to states, whereas gross tax revenue includes the share devolved to states. Similarly, food subsidy as a proportion of GDP is approximately 0.6%. These are different denominators and should not be conflated. For comparison, the 2026–27 allocation for education is ₹1.39 lakh crore and for health and family welfare is ₹1.065 lakh crore. Their combined allocation of approximately ₹2.46 lakh crore is only marginally greater than the food subsidy bill. This comparison highlights the importance of examining the relative allocation of public resources, particularly when fiscal consolidation is becoming a continuing budgetary objective.

Conclusion: From Food Security to Human Capital Security

India's food subsidy policy must evolve alongside its changing poverty profile. A reduction in extreme poverty provides an opportunity to reassess beneficiary coverage, but it does not justify assuming that all households currently receiving food assistance have achieved sustainable economic security. The more appropriate approach is to distinguish between households requiring permanent food support, those needing temporary protection against economic shocks and those whose incomes have improved sufficiently to reduce their dependence on subsidies. Periodic updating of beneficiary databases, better identification of vulnerable migrant households, nutritional diversification beyond rice and wheat, reduction of procurement and storage inefficiencies and improved targeting could gradually moderate the fiscal burden without compromising food security. The resulting savings should strengthen education, healthcare, nutrition, skill development and employment generation. India's poverty reduction should ultimately be reflected not merely in fewer people requiring subsidised foodgrains, but in more households earning enough to purchase nutritious food independently. The objective of fiscal consolidation should therefore be to transform welfare expenditure into productive human-capital investment over time, rather than simply reduce the expenditure recorded under social protection. Food security is an essential foundation of development, but sustainable poverty reduction requires education, healthcare, productive employment and rising real household incomes. The real measure of success would be an economy in which the government can gradually spend less on compensating for inadequate purchasing power because citizens have acquired the economic capacity to secure their own well-being.

The Silent Squeeze: Low Savings, High Debt, and the Interest Payment Burden on India's Economy.....

Introduction

India stands at a fascinating crossroads of rapid macroeconomic expansion and underlying structural friction. While the country regularly celebrates its status as one of the fastest-growing major economies globally, a closer inspection of its domestic balance sheet reveals deep vulnerability. Two prominent trends—the cooling of household financial savings and an elevated public debt-to-GDP ratio—are increasingly intersecting through the heavy mechanics of interest payments. Together, they create a quiet squeeze on fiscal flexibility and long-term private capital accumulation.

The Puzzle of Shifting Household Savings

Indian households have traditionally served as the primary engine of national capital formation, yet their net financial savings have experienced a notable contraction relative to historical baselines. Data shows that household net financial savings slipped to a multi-year low of around 5.1% to 5.3% of GDP before recovering modestly to approximately 6% to 7% in recent fiscal cycles, remaining well below the comfortable historical baseline of 7% to 8%. Even as gross household savings (inclusive of physical assets like real estate and gold) hover near 21% to 21.7% of GDP, the financial component has suffered because families are taking on leverage at a much faster rate. Household financial liabilities have swelled alongside an explosion in personal loans, credit cards, and consumer credit, meaning a larger chunk of domestic savings is consumed simply by servicing debt rather than funding productive enterprise.

The Public Debt and Interest Payment Burden

On the public finance front, India’s central and general government debt-to-GDP ratio remains a subject of intense policy scrutiny. The central government’s outstanding liabilities sit at approximately 55.6% to 56.1% of GDP, while general government debt spans closer to 81% to 82% of GDP when combined with state obligations. The core issue with this massive stock of debt is not merely its headline size, but the relentless flow required to service it. Interest payments alone consume roughly 38% to 40% of the Union government's total revenue receipts, absorbing over ₹12.7 lakh crore annually. This makes interest payments the single largest item of expenditure in the national budget—outstripping allocations for health, education, and social protection combined.

The Intersection: How Interest Rates Bind Both Sectors

The overlap between low household savings and high public debt creates a classic crowding-out and cost-of-capital dilemma. When household net financial savings shrink, the domestic pool of low-cost loanable funds available to absorb sovereign bonds contracts, putting upward pressure on domestic bond yields and government borrowing costs. Simultaneously, because the government must continuously roll over a massive stock of debt and allocate nearly two-fifths of its revenue to interest payments, its fiscal space for growth-spurring capital expenditure or targeted welfare is severely constrained. High interest payments force the state to run persistent fiscal deficits or lean heavily on market borrowings, which in turn keeps benchmark interest rates elevated across the economy.

Macroeconomic Consequences and Structural Risks

This dynamic inflicts heavy collateral damage on the broader economic machinery. For households, higher interest rates translate into steeper Equated Monthly Instalments (EMIs), squeezing disposable income, suppressing aggregate consumer demand, and trapping lower- and middle-income groups in cyclical borrowing. For the government, the high cost of debt service reduces its maneuverability to cushion the economy against external shocks like global oil price spikes or geopolitical instability. Furthermore, when domestic savings are inadequate to fund domestic investment, the economy becomes more dependent on volatile foreign portfolio flows and external debt, increasing vulnerability to global monetary tightening.

Conclusion

India's economic trajectory cannot rely indefinitely on high-speed growth to outrun the friction of low net financial savings and heavy public interest outlays. Restoring a healthy balance requires deliberate policy calibration—incentivizing formal financial savings, broadening the tax base to gradually whittle down the primary deficit, and ensuring that public debt is strictly deployed into high-multiplier infrastructure rather than recurring revenue consumption. Only by addressing the dual drain of household leverage and sovereign debt-servicing costs can India transform its headline growth into deep, resilient, and self-sustaining national wealth.

The Umbrella in the Cupboard: India’s Fiscal Space and the Storms No Budget Predicts.....

The Headroom Illusion

Fiscal space is often reduced to a single number, the deficit, but it is better understood as the room a government has to borrow in a crisis without frightening lenders, fuelling inflation or crowding out private credit. By that standard, India’s headroom is narrower than the headline suggests. The Union Budget for 2026-27 sets the fiscal deficit at 4.3 per cent of GDP, against 4.4 per cent in the 2025-26 revised estimates. The Centre has also moved its anchor from annual deficit targets to debt. Debt is pegged at 55.6 per cent of GDP in 2026-27, down from 56.1 per cent, with a goal of 50±1 per cent by 2030-31. That is credible consolidation, but India’s general government debt (Centre plus states) is still close to 80 per cent of GDP by most international estimates, and a large share of every rupee collected goes to interest. In the 2025-26 budget, interest took roughly a quarter of central expenditure. Headroom is what remains after those commitments are met, and it is thinner than it looks. rbitaxtmi

The Contingencies Budgets Don’t Print

The most dangerous fiscal risks are the ones that never appear in the deficit arithmetic. Contingent liabilities such as guarantees to public enterprises, bank recapitalisation needs, distressed power distribution companies and off-budget borrowing can migrate onto the balance sheet suddenly, as bank recapitalisation did after 2015. States, whose borrowing the Centre does not control, add a further layer, and pension obligations quietly accumulate. On top of these sit the true “unknown unknowns”: a synchronised oil spike, a monsoon failure, a tariff war that damages exports, a cyclone or flood that needs relief at scale, or a sovereign downgrade triggered by a global bond sell-off. None of these can be forecast, but all of them can be provisioned for. Fiscal space is therefore less a fixed stock than an insurance policy, and its value shows only when the claim arrives.

2008-09: The First Great Splurge

The global financial crisis tested India when it was fiscally fit. The Centre’s deficit had fallen to about 2.5 per cent of GDP in 2007-08, after the FRBM Act and a boom in tax revenue. Between December 2008 and February 2009, three stimulus packages followed. They included a 4-percentage-point cut in excise duty, a 2-point cut in service tax, expanded rural spending and a farm-loan waiver of about ₹60,000 crore. The deficit swelled to roughly 6.0 per cent of GDP in 2008-09 and 6.5 per cent in 2009-10, with the combined Centre and state deficit near 9 per cent. The recovery was quick: growth slowed to about 6.7 per cent, then rebounded to 8.6 per cent in 2009-10 and above 8 per cent the next year. The bill came due, however. Inflation turned sticky and reached double digits, the current account deficit widened to about 4.8 per cent of GDP in 2012-13, and the 2013 “taper tantrum” hit the rupee hard, because the stimulus had been withdrawn too slowly.

2020-21: The Pandemic Stress Test

COVID-19 was a far deeper shock. The government announced the Atmanirbhar Bharat package of about ₹20 lakh crore, nearly 10 per cent of GDP in headline terms, although most analysts put the direct fiscal cost at only 1 to 2 per cent of GDP. The rest was liquidity support and credit guarantees, which are contingent liabilities in their own right. Even so, the 2020-21 fiscal deficit reached about 9.2 per cent of GDP as revenues collapsed, and free foodgrain for around 80 crore people became a major outlay. Central debt rose from about 49 per cent of GDP to nearly 60 per cent. The economy contracted by roughly 5.8 per cent in 2020-21 and rebounded by about 9 per cent the following year. Unlike in 2008, India chose a cautious, supply-side-heavy response, relying on guarantees and capital expenditure rather than a broad demand boost. That limited the debt cost, though the recovery was uneven and the informal sector took a lasting hit.

What the Two Episodes Teach

Three lessons stand out. First, stimulus works fastest when the economy has spare capacity and a banking system able to transmit it, which was true in 2009 and 2021 alike. Second, the quality of spending matters more than its size: capital outlay and targeted transfers hold up better than across-the-board tax cuts that are hard to reverse. Third, exit speed is the real test. After 2009, consolidation lagged and inflation and external imbalances followed. After 2021 the Centre moved faster, with the deficit falling from about 6.7 per cent of GDP in 2021-22 to 4.8 per cent in 2024-25, helped by buoyant nominal growth. Both episodes also show that India’s growth recoveries came with a macro hangover, whether inflation, a wider current account deficit or an interest-rate cycle, and that the hangover is the price of using fiscal space.

Rebuilding the Cupboard

India’s current strategy is sensible: shrink the debt ratio steadily and protect capital spending. Capital expenditure is held at 3.1 per cent of GDP in 2026-27, with effective capital expenditure at 4.4 per cent, up from 3.9 per cent, which builds productive capacity while deficits narrow. The case for continuing is strong, because every point of GDP shaved off debt buys future room to respond to a shock. Several steps would make that room more usable: publishing a fuller statement of contingent liabilities including guarantees; bringing off-budget borrowing back on the books; improving the finances of state power utilities; and widening the tax base so that revenue does not collapse when growth stumbles. A modest contingency buffer, whether a stabilisation fund or simply a habit of running primary surpluses in good years, would add resilience. Fiscal space cannot be created once the storm arrives, so the time to refill it is when the sky is clear. The next crisis will not look like 2008 or 2020, but a country that has rebuilt its buffers will be better able to respond to it.

Buying Low, Selling High, in Plain Sight: Could Two-Way Daily Intervention Anchor the Rupee?

The Idea

Imagine the Reserve Bank of India stepping into the currency market every day, openly and in both directions. When the rupee is unusually strong and dollars are cheap, it buys dollars. When the rupee is weak and dollars are expensive, it sells them. Because the market would see it trading both ways, no one could reliably read its next move, and the "confusion" would discourage one-way bets. The pitch is that this stabilizes the exchange rate and earns a profit, since the central bank is systematically buying cheap and selling dear. It sounds almost too neat, which is why it deserves a proper debate rather than applause.

 

The Case in Favour

The strongest argument is Milton Friedman's old one: speculation that buys low and sells high is stabilizing by nature, because it dampens the swings it profits from. A central bank with deep reserves and no need to make a profit in any given week is well placed to play that role. If noise traders and momentum chasers push the rupee away from fundamentals, a counterparty that leans against them pulls the price back and collects the reversion as gain. Daily, visible activity also gives the market a stable reference point. Participants who know a large player will absorb extreme moves have less reason to panic or pile in. Over time, lower volatility lets importers, exporters and borrowers hedge more cheaply, which is a real welfare gain for a trade-dependent economy.

 

Where It Fits in the RBI Playbook

In practice, the RBI already does a version of this. It says it targets no specific level and acts only to curb excess volatility, and it has long "leaned against the wind," buying dollars when inflows surge and selling when outflows threaten disorderly depreciation. It uses spot operations, forward positions and buy-sell swaps to shape both the exchange rate and rupee liquidity. Disclosing intervention data with a lag already adds some transparency. So the proposal is less a new tool than a more systematic, rule-like, and publicly legible version of existing behaviour. That is its attraction, and also its risk, because turning discretion into a visible routine changes how the market responds to it.

 

The Objection: Net Position and the Limits of Netting

Skeptics begin with arithmetic. If purchases and sales roughly offset, the RBI's net foreign-exchange position barely changes. Reserves stay flat, and the lasting effect on rupee liquidity is close to zero. Under portfolio-balance thinking, a currency's level is driven by the relative supply of assets and by fundamentals such as the current account, capital flows, interest differentials and oil prices. A trade that nets out cannot move those. Nor is the profit guaranteed. Mean reversion is not a law of nature, and in a sustained depreciation, "buying the dip" means accumulating a depreciating asset. Even when it works, holding dollars carries the opportunity cost of rupee interest rates, and buying them injects rupees that may need sterilizing at a further cost. The profit is real only if the rupee oscillates around a stable anchor, and not if it is trending because the economy is changing.

 

Expectations as the Real Lever

The better reply is that the policy does not need to move fundamentals, because most day-to-day volatility is about expectations rather than flows. If agents believe the RBI will lean against extremes, their own behaviour shifts: fewer destabilizing bets, tighter ranges, more willingness to take the other side of a spike. In that case the central bank's credibility does the work, and actual intervention can shrink over time, much like a lender of last resort that rarely needs to lend. The open daily routine helps here. A policy that is regular, understood and consistent coordinates beliefs. The catch is that "confusing" agents and "openly" announcing a pattern pull in opposite directions. Ambiguity about direction deters speculation, but openness about the rule invites agents to learn it, and a learnable rule can be gamed.

 

The Risk of a Predictable Rule

Once traders understand the rule, they can trade against its edges. If everyone knows the RBI sells dollars above a certain zone, the rational move is to test that zone, forcing the bank to spend reserves, or to bet on the point where the rule breaks. Currency history is full of defended levels that attracted attackers precisely because they were visible, from the European exchange-rate mechanism crisis of 1992 to several emerging-market pegs. A rule-based, two-way approach is safer than a hard peg because it defends no single level, but the principle holds: predictability and profitability for the central bank rarely coexist. Mixing in discretion, varying the size and timing of trades, and using the forward book alongside spot operations preserve the deterrent without handing speculators a script. Over-trading also has costs, because large visible operations can themselves unsettle a thin market.

 

Verdict: Feasible, but as Smoothing, Not Stabilization

The honest conclusion is that the idea is feasible as a volatility-smoothing tool and unconvincing as a way to stabilize the exchange rate's level. Two-way daily operations can reduce noise, build credibility and may earn modest gains in range-bound conditions, so it earns a place in the RBI's toolkit as a refinement of what it already does. It cannot override the current account, global dollar cycles, or sustained capital outflows, and when those dominate, the reserve buffer and monetary policy do the heavy lifting. Netting means the strategy is cheap in reserves but also limited in force. Profit should be treated as a by-product, never as the objective, because a central bank that starts chasing trading gains risks mistaking market-making for macroeconomic stability. Used with that humility, openly two-sided intervention can help the rupee move in a calmer, more predictable band without pretending to fix its direction.