What Really Drives Central Bank Rate Decisions

Behind Closed Doors: How RBI Actually Makes Rate Decisions

When the RBI cuts rates by 100 basis points, markets celebrate or panic within minutes. But inside the central bank’s Mumbai headquarters, that decision took months of economist debates, scenario modeling, and deliberate institutional process that Governor Sanjay Malhotra has now revealed. Since taking office, Malhotra has formalized RBI’s consultative process, involving economists, bankers, and academics ahead of every Monetary Policy Committee (MPC) meeting. Internally, a “mindset of inquiry” is now expected: assumptions are challenged, scenarios modeled, and international precedents weighed.

The goal is not just to make decisions, but to make better ones,

Malhotra explained during a recent policy briefing, describing how RBI now requires internal dissent and challenge sessions before every MPC vote.

By grounding rate decisions in evidence and internal dissent, RBI aims to insulate itself from both political pressure and market noise. The process itself becomes the policy instrument.

Real Example of RBI’s Process: before the recent 100 bps repo cut, RBI economists spent weeks modeling scenarios: What if food inflation resurged? How would global rate cuts affect capital flows? Internal critics were required to present counter-arguments before the MPC vote.

Fighting Inflation with Discipline, Not Reaction

Malhotra was careful to avoid triumphalism when discussing inflation. While India’s headline CPI dropped from 7.8% in April 2022 to 3.1% in June 2025, he called this a “battle won,” not a “war.” The RBI’s target range remains 4% ± 2%, and future readings – especially for volatile components like food – still require vigilance.

The current policy stance is deliberately neutral. That flexibility is central to RBI’s strategy. 

We can move up, down, or pause, depending on incoming data,

Malhotra said.

Recent actions have included a 100 bps reduction in the repo rate, with June figures showing that rates on new loans dropped by at least 50 bps – evidence, he argues, of effective transmission. Decisions are made with a 6-12 month view, prioritizing medium-term stability over short-term applause.

Responding to critics who claim the RBI “played its cards too early,” Malhotra defended the pace: monetary policy, he emphasized, works with a lag, and the best way to build credibility is through calibrated decisiveness.

Monetary Tools Are Also About Politics and Power 

Beyond repo rates, Malhotra revealed how the RBI’s recent reduction in the cash reserve ratio (CRR) – from 4% to 3% – wasn’t just about liquidity management. It aimed to lower intermediation costs, helping both borrowers and savers. In Malhotra’s view, regulatory tools must balance growth support with systemic caution.

He also addressed broader debates like de-dollarisation and BRICS alternatives. Despite global interest, he was unequivocal: the U.S. dollar remains dominant, and building a viable alternative requires “years of institutional development, trust-building, and economic realignment.”

As for domestic regulatory ambitions, the RBI is consolidating nearly 8,000 rules into a streamlined, modular framework. A new review cell will assess all directives every 5-7 years, looking at relevance, cost-benefit impact, and user-centricity.

Malhotra’s approach reflects a broader shift: central banking as governance, not just reaction. 

Our job is not to fence off the road, but to set the guardrails.

Malhotra said this in reference to RBI’s oversight role, highlighting his belief in enabling innovation while maintaining regulatory boundaries.

What This Means for Markets

Malhotra’s institutional approach signals a more predictable – but not necessarily more dovish – RBI. Markets expecting quick reactions to headline data may be disappointed. Instead, expect measured moves based on 6-12 month projections, not daily inflation prints. 

For crypto and equity traders watching Fed moves, understanding RBI’s deliberate process may matter more than guessing the next rate decision. The “guardrails” Malhotra describes suggest policy stability, even amid global volatility.