On interest rates, Monetary Policy Committee can’t be both dovish and hawkish

In its last meeting, the RBI’s Monetary Policy Committee voted unanimously to keep the benchmark repo rate unchanged at 5.25 per cent. The tone of the policy was more dovish than many at that time had expected. This led to a view among analysts that rate hikes were not imminent even as inflation was projected to be above target. But the minutes of the same meeting, released a few days ago, suggest that the current situation is unlikely to be maintained over the near term. The divergence is striking.

The members from the central bank on the committee displayed a distinct hawkishness. As a report by economists at the SBI says, “the Governor MPC minutes statement shows inclination towards policy tightening… DG, RBI calls for a possible rate hike later in the year, while ED, RBI just stops just short…” Alongside, external members on the committee like Saugata Bhattacharya and Ram Singh have drawn attention to the real interest rate. The RBI’s own inflation projections point towards negative real interest rates — it has pegged inflation at 5.9 per cent in the third quarter, 5.5 per cent in the fourth quarter, and 5.3 per cent in the first quarter of the next financial year. This implies that real interest rates are negative on a forward basis. Negative real rates are for stimulating economic activity, unlike the stated neutral stance the committee has adopted, which as the RBI Governor has noted in the past, implies no support for economic activity or for controlling inflation. This is also odd considering the central bank’s views on “resilient” growth. “Growth continues to be supported by resilient domestic demand, sustained expansion in manufacturing and services activity, and robust exports,” it notes.

Overall Analysis

The editorial examines the contradictory signals coming from the RBI’s Monetary Policy Committee (MPC) regarding interest rates. The committee kept the repo rate unchanged at 5.25%, and its policy statement appeared relatively dovish, suggesting that an immediate rate hike was unlikely. However, the minutes of the meeting revealed that several MPC members were actually leaning towards a hawkish approach, including the possibility of raising rates later.

The central argument is built around this dovish–hawkish contradiction. A dovish monetary policy generally favours lower interest rates and greater support for economic growth, while a hawkish policy gives greater importance to controlling inflation, often through higher interest rates. The title itself — “can’t be both dovish and hawkish” — captures the author’s concern that monetary policy should communicate a clearer and more consistent direction.

The editorial then focuses on real interest rates. The RBI’s inflation projections are higher than the current repo rate, which means that the real interest rate is expected to remain negative. In simple terms, when inflation is higher than the nominal interest rate, the purchasing power of money declines faster than the return earned on it. The author points out that negative real rates are normally associated with stimulating economic activity, whereas the MPC has adopted a neutral stance.

This creates another contradiction. If the economy is already showing “resilient domestic demand,” expanding manufacturing and services, and robust exports, why should monetary policy continue to provide conditions that stimulate demand? At the same time, if inflation remains above the RBI’s target, a more restrictive policy could become necessary.

From a language perspective, the editorial uses economic terminology, contrast, evidence and logical questioning rather than emotional language. Words such as “divergence,” “policy tightening,” “negative real interest rates,” “neutral stance,” and “resilient growth” make the writing technical and analytical. The author also uses quotations from economists and RBI officials to strengthen the argument.

The editorial’s main concern, therefore, is not simply whether the RBI should increase or decrease interest rates. It is about policy consistency and clear communication. A central bank must ensure that its policy statement, economic projections and individual members’ positions collectively convey a reasonably coherent message to markets and the public.

Important Vocabulary — 5 Words

1. Dovish – favouring lower interest rates and policies that support economic growth.
2. Hawkish – favouring tighter monetary policy, usually to control inflation.
3. Divergence – a situation in which two things move or develop in different directions.
4. Resilient – strong enough to recover quickly or continue despite difficulties.
5. Conflation / Conflate – to combine two different ideas or issues as though they were the same.

Conclusion & Tone

The editorial argues that the MPC needs to reduce the gap between its stated neutral stance and the increasingly hawkish signals emerging from its members. With inflation projected above the target and growth described as resilient, the RBI faces a difficult balancing act between controlling prices and supporting economic activity.

Tone: Analytical, critical, questioning and economically informed.

Core message: Monetary policy should be clear and consistent; it cannot simultaneously signal support for growth and prepare markets for tighter policy without creating confusion.