Tools / Policy rule

A policy rule for RBI

Where would the repo rate be if RBI followed a simple Taylor-type rule? Choose the assumptions; the chart compares the rule's rate with the repo rate the MPC actually set, from 2016-10 to 2026-09.

Rule rate = r* + inflation + a × (inflation − target) + b × (GDP growth − potential growth)

How it works

The rule says the policy rate should equal a neutral real rate plus current inflation, raised when inflation is above target and when the economy grows faster than its potential. Inflation is headline CPI, % on a year earlier, as MoSPI published it. Growth is real GDP growth in the quarter the month falls in, as published; months whose quarter is not out yet use the latest published quarter. Actual is the repo rate set at the most recent MPC meeting.

The defaults are placeholders, not estimates: the neutral rate and potential growth cannot be observed, and reasonable people choose different values. Use the rule to see how much each assumption matters, not as a forecast of what the MPC will do. The original Taylor rule uses an output gap; India's national accounts on the 2022-23 base start too recently to estimate a trend, so this version uses a growth gap instead. Because it reacts to year-on-year growth, the rule jumps around 2020-22, when published GDP growth swung from deep contraction to rebound; set the growth weight to 0 to see the inflation-only version.

Data downloads: CPI inflation, GDP growth, MPC decisions.