Structural Factors vs. Monetary Tools: Rethinking Inflation Control

Context:

In May 2025, India’s inflation rate dropped below 3%, celebrated as a sign of successful monetary policy by the RBI. However, a deeper analysis reveals that this decline masks rising unemployment and a broad economic slowdown, raising concerns about the true health of the economy.

Inflation vs. Unemployment: A Contradictory Trend

• Inflation fell from 3.2% (April) to 2.8% (May 2025).

• Unemployment rose from 5.1% to 5.8% in the same period (PLFS data).

• While lower inflation benefits those already employed, it does nothing for the unemployed, especially those in informal and migrant sectors.

• Dominant economic narratives often exclude these vulnerable groups, creating a class-based bias in policy celebrations.

Growth Slows Down Sharply

• GDP growth fell from 9.2% (2023–24) to 6.5% (2024–25).

• This slowdown is consistent with rising unemployment.

• According to NSO, nearly all sectors decelerated, except agriculture and public administration.

• Despite this, media focus remains largely on inflation, ignoring growth and employment concerns.

Why Did Inflation Fall? Not Due to Monetary Policy

• Food inflation dropped from nearly 11% (Oct 2024) to under 1% (May 2025).

• This is due to strong agricultural output, narrowing the supply-demand gap.

• The repo rate has been unchanged since June 2022, indicating that RBI policy wasn’t the direct cause of this decline.

• Even service sectors, less affected by credit, showed a slowdown—further weakening the argument for monetary policy effectiveness.

Limits of Monetary Policy in Indian Context

• India follows an inflation targeting model that adjusts interest rates to control demand.

• However, inflation in India is often driven by structural supply-side issues, especially in agriculture.

• Monetary tightening may offer temporary relief, but it's ineffective long-term in addressing such structural factors.

• A 2025 study (Structural Change and Economic Dynamics) shows interest rates have little impact on inflation; agriculture plays a larger role.

Inflation Expectations & RBI Credibility

• RBI argues that its policy shapes inflation expectations.

• However, household expectations remained high and stable from March 2024 to May 2025, well above the 4% target.

• This undermines the idea that RBI policy has anchored expectations.

• RBI’s stance to lower repo rates further if inflation continues to fall suggests a reactive, not proactive, policy approach.

Conclusion: Inflation Alone Does Not Reflect Economic Health

• The recent fall in inflation must be viewed alongside rising unemployment and slowing growth.

• Data indicates the real driver of low inflation is agricultural growth, not monetary policy.

• Overemphasising interest rates while ignoring job losses and sectoral imbalances offers a misleading picture.

• A balanced approach is needed—one that:

  • Acknowledges monetary limits,

  • Strengthens structural reforms, and

  • Bridges the gap between agricultural and non-agricultural sectors.