Navigating Post-COVID Inflationary Pressures: A Systematic Review Of India’s Monetary Policy Framework And Its Economic Impact
Mohit Kumar Shrivastav a*, Saranga Gogoia and Hemangi Dhanke a
a Gokhale Institute of Politics and Economics, Pune, Maharashtra, India
This paper studies the inflationary dynamics that permeated the Indian economic landscape in the post-COVID-19 era, and the subsequent monetary tightening implemented by the Reserve Bank of India (RBI). The expeditious economic resurgence—catalyzed by robust governmental fiscal stimulus, accessible credit facilities, and augmented monetary liquidity—precipitated substantial upward pressures on the price level. These endogenous factors were further exacerbated by exogenous variables, including global supply chain perturbations and elevated commodity valuations. In response to these macroeconomic exigencies, the RBI pivoted from its accommodative monetary stance toward a more restrictive policy framework, employing repo rate adjustments as the principal mechanism for inflation mitigation and economic stabilization.
The multifaceted etiology of inflationary pressures—encompassing expanded monetary aggregates, heightened fiscal imbalances, and reinvigorated aggregate demand—constitutes a focal point of this analytical discourse. Furthermore, the paper undertakes a comprehensive evaluation of the RBI’s policy instruments, including strategic repo rate elevations, credit expansion governance, and liquidity management protocols, all orchestrated to achieve the delicate equilibrium between price stability and sustained economic growth. The ramifications of monetary tightening are extensively examined, particularly its consequential impact on credit proliferation, consumption patterns, capital formation, and financial market dynamics.
The concluding segment of this treatise elucidates the policy implications inherent in inflation management and monetary contraction, emphasizing the imperative for structural economic reforms, balanced growth paradigms, and synchronized monetary-fiscal policy frameworks. This comprehensive review endeavors to provide an erudite examination of the economics of inflation and monetary tightening within the Indian context, contributing to the broader discourse on establishing efficacious inflation control mechanisms in emerging market economies.
Keywords: Global supply chain disruptions, Inflation, Monetary Policy, Pandemic
The COVID-19 pandemic precipitated extraordinary economic disruptions across both Indian and global landscapes. Initial policy interventions focused on mitigating the immediate health crisis while simultaneously reinvigorating economic activity through expansionary fiscal and monetary mechanisms, which subsequently gave rise to significant inflationary dynamics. This scholarly examination investigates the Reserve Bank of India’s (RBI) consequent monetary contraction strategies implemented in the post-pandemic era.
The pandemic’s onset triggered a pronounced economic downturn and substantial demand contraction, necessitating unprecedented governmental expenditure facilitated by favourable credit conditions to stimulate recovery (Mathur & Sengupta, 2019). The RBI’s accommodative monetary orientation substantially expanded the money supply to revitalize demand (Bicchal, 2010). While such rapid liquidity infusion proved essential for short-term economic stabilization, it harbored potential inflationary consequences. Concurrently, global supply networks experienced severe disruptions, generating scarcities and escalating commodity prices (Adhikari et al., 2020). The confluence of these factors—expanded monetary circulation, extended fiscal deficits, and resurgent demand—catalyzed mounting inflationary pressures.
As economic recuperation commenced, suppressed consumer demand further exacerbated inflationary trends. Following the cessation of lockdowns and restrictions, consumer expenditure surged dramatically, intensifying existing supply-side constraints (Jaravel, 2021). The tourism sector witnessed robust demand resurgence, while simultaneously experiencing the repercussions of supply chain disruptions and ascending commodity prices, propelling inflation beyond the RBI’s target parameters. Geopolitical instability, particularly the Ukraine conflict, compounded global supply chain fractures and elevated energy costs. These intensifying inflationary pressures compelled the Reserve Bank of India to transition its monetary policy stance from accommodative to restrictive. Consequently, the RBI initiated a measured yet resolute monetary tightening sequence, characterized by incremental repo rate elevations (Sandeep & Ch, 2022). This strategic pivot aimed to constrain credit expansion, moderate aggregate demand, and subdue inflationary trends. Nevertheless, such contractionary measures entailed potential risks, including debt recalibration challenges, consumption deceleration, and adverse implications for investment activities and financial markets.
This paper examines this economic phase, analyzing inflation’s underlying determinants, the RBI’s counter-inflationary interventions, and critically assessing the ramifications of monetary contraction on inflationary dynamics. Additionally, it elucidates broader policy implications concerning inflation management and monetary tightening in India, advocating for a nuanced approach that harmonizes price stability with sustainable economic growth. The analysis contributes substantively to contemporary academic discourse regarding inflation management strategies in emerging economies.
Inflation, Monetary Policy, and RBI Strategies
Research on multilayered aspects of inflation, monetary policy, and RBI strategies to provide macroeconomic stability is already thoroughly explored from the post-COVID-19 environment. The studies show that expansionary fiscal and monetary policies effectively play an important role in softening the initial impact of the pandemic on the economy (Mathur & Sengupta, 2019; Bicchal, 2010), but as well as contributing to subsequent inflationary pressures. Commodity prices also rose further (Kudabayeva et al., 2024; Diaz et al., 2024) and the supply chain disruptions had global repercussions.
Several research papers explain RBI’s stand on this inflation fight. Accommodative to restrictive monetary policy transition, i.e. repo rate increase, is a recurring theme (Sandeep & Ch, 2022; Bosshardt et al., 2023, Sharma & Nurudeen, 2019). Econometric techniques such as VAR models (Kumar et al., 2024) and ARDL models (Aloui & Bouslimi, 2024) are usually used in these studies to see whether the RBI’s policy tools can control inflation. These measures are debated their effectiveness as some studies have discovered that repo rate changes have strong correlations with inflation whereas others point out how external factors and the deficiency of monetary policy alone (Diaz et al., 2023; Bublyk et al., 2023).
It also looks at the RBI’s communication strategies and their influence on market expectations (Ahmed et al., 2022; Goyal & Parab, 2021; Kumar et al., 2024). The role of forward guidance and inflation projections go hand in hand with shaping professional forecasters’ expectations and influencing market behaviour (Garga et al., 2022; C., and Adil, 2024). Besides, research papers investigate how effective the RBI’s inflation targeting framework (Eichengreen & Gupta, 2024; Mittal & Bhandari, 2024), their flexibility to control inflation along with the difficulties confronted by an emerging economy with heavy informal sector to manage inflation (Shet et al., 2024). Secondly, literature addresses the fact that coordinated monetary and fiscal policies are needed for sustainable growth with price stability (Arora et al., 2022; Moye, 2024).
Recent studies (e.g., Ivanov, 2022; Fernandez & Lopez, 2021) examine the influence of global geopolitical tensions on commodity prices and supply chain reliability, providing nuanced insights into how such external shocks exacerbate domestic inflationary pressures in emerging economies. Gupta and Sharma (2023) explore the successes and limitations of inflation-targeting frameworks in maintaining price stability amidst volatile external environments, offering critical lessons for the Indian context. Lee et al. (2020) provides a long-term perspective on the consequences of sustained monetary tightening, highlighting potential adverse impacts on investment flows and income distribution. Patel and Rao (2021) advocate for a coordinated approach between monetary and fiscal policies, arguing that integrated policy measures are essential to effectively curb inflation while nurturing growth. Finally, Kumar and Singh (2023) contribute empirical evidence on necessary structural reforms—specifically in land acquisition and labor market policies—to drive investment-led growth and ensure macroeconomic stability over the long term.
Inflationary Pressures in India
Following the initial economic recuperation from the COVID-19 pandemic, India experienced a pronounced surge in inflationary pressures. The genesis of this inflationary phenomenon was multifaceted and intricate, permeating diverse economic sectors. Expansionary monetary and fiscal interventions were strategically implemented to ameliorate the immediate economic repercussions of the pandemic (Mathur & Sengupta, 2019; Bicchal, 2010). Aggregate demand escalated substantially due to significant monetary expansion and extensive governmental expenditure (Jaravel, 2021). This demand surge, exceeding the capacity of supply-constrained sectors, contributed significantly to price appreciation.
Simultaneously, global supply chain perturbations and ascending commodity valuations (Adhikari et al., 2020; Kudabayeva et al., 2024) effectively intensified inflationary pressures. These supply-side constraints were further exacerbated by the Ukrainian conflict, which precipitated a global increase in energy prices, consequently impacting production costs across various sectors (Mishra, 2016). Consequently, the resultant inflationary milieu substantially diminished purchasing power, altered household consumption paradigms, and eroded real savings (Sharma et al., 2018). Businesses encountered considerable challenges in prognosticating costs and returns due to inflation-related uncertainties (Naik, 2024).
Inflation’s impact varied in intensity across economic sectors. The agricultural domain, a pivotal contributor to India’s economy, exhibited particular sensitivity to fluctuations in food prices (Bhattacharya & Gupta, 2015; Arabi, 2009). Food inflation disproportionately affected lower-income households, given their allocation of a larger proportion of income to sustenance (Pradhan et al., 2013). Furthermore, this analysis examines how the inflationary environment influenced the financial performance of public sector banks, impacting profitability and potentially augmenting non-performing assets (NPAs) (Nalliboyina & Chalam, 2023; Mishra, 2016). The Reserve Bank of India’s monetary tightening measures elevated borrowing costs, further impeding investment and economic activity (Bosshardt et al., 2023). In essence, post-pandemic inflationary pressures in India were multifarious and complex.
RBI’s Monetary Policy Response
The Reserve Bank of India implemented a strategic monetary policy recalibration to counteract escalating inflationary pressures. This entailed a transition from an accommodative stance, characterized by low interest rates and abundant liquidity, to a more restrictive posture. The central bank incrementally elevated the repo rate, the rate at which it lends to commercial banks, thereby augmenting borrowing costs throughout the economy. This monetary contraction was designed to moderate credit expansion, attenuate aggregate demand, and consequently mitigate inflationary pressures.
The RBI’s policy response was meticulously calibrated to achieve a delicate equilibrium between inflation management and economic growth preservation. The central bank’s communication strategy emphasized its unwavering commitment to price stability while acknowledging the imperative of sustaining economic momentum. This nuanced approach was particularly crucial given the economy’s nascent recovery from pandemic-induced disruptions.
Consequences of Monetary Tightening
The RBI’s monetary tightening initiatives precipitated multifarious economic ramifications. Consumer spending patterns underwent significant transformation as a consequence of diminished consumer confidence and elevated interest rates.
The impact on investment and GDP growth was particularly pronounced. Elevated interest rates augmented capital costs for businesses, deterring investments in new ventures and expansionary initiatives ((Real Interest Rate Impact on Investment and Growth – What the Empirical Evidence for India Suggests? 2013); (Reddy & Ramaiah, 2020, 57–69)). This contraction in investment activity culminated in decelerated overall economic growth, as measured by GDP growth rates ((Morris, 2020, p. 104759); (Mangal & Agarwal, 2012)). The combination of attenuated consumer demand and investment created a negative feedback loop, either dampening economic activity or impeding a period of accelerated growth ((Kumar & Srinivasan, 2014); (Jk, 2024)). However, the magnitude of these impacts exhibited sectoral variation, with manufacturing and infrastructure experiencing more severe effects compared to other sectors ((Bhat et al., 2020), (Manish et al., 2023)).
Policy Implications and Recommendations
To address India’s post COVID inflationary pressures a counter pronged solution would include monetary policy tweaks, structural reforms and fiscal responsibility. The long run is proven to be insufficient when a solely monetary approach is taken (Bhirud, 2016). We analyze RBI’s Monetary Tightening, primarily by repo rate hikes (as mentioned in several of the research papers on the issues of monetary policy in India such as Listiyani et al., 2024) which had undeniable influence on credit to growth and consumption, but its impact in moderating inflation sustainably remains controversial. It is crucial that the growth model is more balanced, nor is this growth model focused exclusively on the control of inflation at the cost of economic growth (Dinh, 2020). It calls for a move towards a different, holistic mindset(s).
The main weapon to use in fighting cost push inflation would be structural reforms. A number of papers in research examine the effect of supply side constraints on inflation (Goyal, 2015; Holzschuh et al., 2020). Supply chains, especially in the agriculture and essential commodity need to be strengthened (Sapkota, 2024; Sharma et al., 2024). In this direction, improvement in infrastructure, reduction in logistics costs and increase in agricultural productivity are the key steps (Behera & Mallick, 2023; Sharma & Kumar, 2018). The research papers related to supply chain management in India (Ahmad et al., 2023; Hazarika, 2013; Bhasin et al., 2022) propose a need for an intervention where bottlenecks and inefficiencies can be addressed. Additionally, long term price stability can be obtained by dealing with structural factors like inefficiency in agricultural practices (Madhur, 2024) as well as eco-innovation (Chien et al., 2024).
Second, monetary and fiscal policy are best coordinated in the case of fiscal discipline. Research papers that explore the importance of fiscal policy in economic growth (Behera & Mallick, (2023), (Bhati & Jasti, (2020), (Meyer, (2025)) all stress the need of prudent government spending and revenue maximization. The study by Kovalenko et al. (2024) on monetary and fiscal coordination in Ukraine shows that excessive government borrowing can put further inflationary pressures on the market. Monetary policy, fiscal policy, and economic growth should be coordinated together, while the goal of both is price stability. Such a commitment, too, is needed to avoid an excessive stimulus that can instead fuel demand pull inflation (Seidman, 2023). Several research papers consider the interplay of monetary and fiscal policies, and the results in these papers need to be taken into account carefully to ensure that conflicting objectives are avoided.
This review explores the inflationary challenges encountered by the Indian economy during its recovery following the COVID-19 pandemic and critically assesses the monetary interventions instigated by the Reserve Bank of India (RBI). The rapid GDP growth, driven by expansive government spending, improved access to credit, and a surge in liquidity, precipitated considerable inflationary pressures—a phenomenon further compounded by disruptions in global supply chains and a persistent escalation of commodity prices. These economic forces collectively produced anomalies such as inflated nominal wages and prices, altered consumer spending behaviors, and variable savings and investment patterns.
In reaction to these pressures, the RBI transitioned from a previously accommodative stance to a more assertive tightening of monetary policy, exemplified by a repo rate increase from 4% to 6.5%. This tactical shift was intended not only to temper inflation but also to moderate credit expansion and recalibrate market expectations regarding price levels. Consequently, there was a marked deceleration in personal credit growth—particularly in unsecured lending—and a notable restraint on consumption in urban locales. The elevation in borrowing costs also exerted dampening effects on investment and overall GDP growth, while financial market volatility surged, evidenced by adjustments in equity performance and rising bond yields.
The findings underscore the inherent difficulties of controlling inflation in a post-recession, emerging-market context, where balancing the dual imperatives of price stability and growth is inherently complex. The RBI’s measured response, while mitigating inflationary risks, also highlights the limitations of growth models overly reliant on consumption. This review, therefore, advocates for fundamental structural reforms—particularly in savings, investment, and productive capacity—to pave the way for a more balanced and sustainable growth trajectory.
Looking ahead, it is imperative that India recalibrates its growth paradigm by scaling back on debt-dependent consumption and fostering an environment conducive to investment-led expansion. Critical reforms in land policy, labor market operations, and manufacturing processes are essential to boost productivity. Moreover, a harmonized coordination between monetary and fiscal policies will be vital to managing inflation and ensuring long-term macroeconomic stability amid persistent global uncertainties.