From the Opinions Editor: The question now is whether the tide has turned. Is the worst over for the economy?

The Reserve Bank of India (RBI) has faced a challenging situation for some time now, grappling with multiple issues such as inflation, the rupee's decline, and rising government bond yields. The central bank's approach suggests a lack of a cohesive strategy. For instance, while inflation has been on the rise, the RBI only raised interest rates in October by just 25 basis points, despite the fact that monetary policy typically takes a long time to show effects.

This raises questions about the bank's forecasting abilities and its fears of economic growth collapsing.

The RBI's intervention in the forex market has also been questioned. While drawing down its reserves to defend the currency was expected, it did not yield the desired results. This could be attributed to the immense size of the forex market, with a daily turnover of $185 billion as of 2025. The RBI's attempts to defend the currency have also led to counterproductive measures that have created problems like liquidity and hedging costs.

However, there have been recent improvements. The rupee has strengthened, bond yields have dropped, and markets have seen a rise. This turn might be due to changes in the external environment, such as the slowing down of foreign capital outflows, a drop in oil prices following the US mid-term elections, and a weakening of US bond yields. This has made Indian assets more affordable and attracted foreign capital back in.

Yet, the RBI's predicament is not over. It must choose between supporting growth with negative real interest rates, intervening in the currency markets to bolster the rupee, and draining liquidity, or shift to exchange rate targeting. The latter could be a worse idea, especially in times of uncertainty. Political issues should not dictate economic policy, as seen in matters like petrol prices.