India Insider: RBI’s Rate Hike Cannot Mask Persistent Issues

Robert Petrucci, an astute observer and writer on the Indian Rupee, argues that an interest rate hike to deal with the problem of higher energy costs will not fix the inflation problem caused by the Middle East conflict. In Petrucci’s opinion, even if a central bank has raised interest rates by full basis point of 1%, it would have little effect on the demand of energy as long as prices remain a geo-politically influenced circumstance. 

Robert Petrucci has also said that the decline in value of the Indian Rupee could also stimulate India’s exports of tradable goods making them cheaper for foreign importers. Evidence shows the cumulative value of India’s merchandise exports between April and August of 2026 reached USD 215.91 billion. This is a 17.85% increase compared to the same five month period in 2025, when exports were USD 183.21 billion.

Even as prices for commodities also rise due to El Nino weather effects, this storyline cannot be entirely blamed. Professor Narayana Moorthy wrote recently that in the State of Tamil Nadu the rise in prices of Agri-commodities can also be attributed to shrinking cultivation areas and stagnant irrigation improvement. Tamil Nadu’s inflation rate in May 2026 reached 5.11% against the national average of 3.93% comparatively. Crop prices cannot be controlled simply by raising interest rates, as Robert Petrucci alludes, without boosting domestic agricultural production capabilities.

Balance of Payments Highlights Another Influence

Despite generating higher GDP growth and claims of economic strength India’s balance of payments remains severely weakened by massive capital flight. By the end of June 2026 a staggering 543.9 billion USD combined had left India, comprised of 316.1 billion in direct investment outflows, 23.4 billion into portfolio funding, and 204.4 billion into other outward stakes. As Professors Jayati Ghosh and C.P. Chandrasekar have written in a recent BusinessLine article, “for a lower middle income country, with most of its development projects incomplete and greatly in need for additional investments, the extent of capital outflows is quite large. It significantly reduces the net inflows that economies in India’s position require for development.”

Economist Michal Kalecki observed in Poland in early twentieth century, capitalists invest only in when they accumulate profits, no matter whether it stimulates wages or reduces unemployment. In that sense, according to Kalecki, the changes in the prices of goods or wages or household demand would not entice a capitalist other than making a profit. They are there to make profits and want to see accumulated retained earnings on balance sheets. If mass consumption is not sufficient enough for their goods and services, investments would channel or divert into other premium products or markets that command higher profits.

Investments, as Kalecki observed via his practical business experience, are not decided by household demand but by businesses decisions that ultimately influence employment and national income. In that sense Kalecki never argued that investment is independent of demand, his thesis is that the capitalists as a class are protected even in a slump, as they would invest in resources that maximize their profits. According to him, investment was not simply a function of interest rates or consumer expectations. It was connected to profitability, income distribution and the contradictions of accumulation. It literally means, any rise in prices of goods and services due to a depreciating currency or supply chain induced inflation would be passed to consumers as we have seen in the last few years, even as real wages are not growing and become unbearable for households.

What India needs is patient capital that funds infrastructure and development, creates jobs, along with some government allocated capital expenditures, rather than capital that solely chases returns or deviates quickly once returns are achieved. By showing the government can provide long-term commitment allowing low return assets that stimulate household demand, this could make private investments profitable in future rounds.

In planned economies like the failed former Soviet Union, authorities frequently forced investments rates up without genuine profitability or consumption orientation. Capital was often misallocated, funds were dispersed via corruption and outright theft. Accountability was certainly not transparent.

Kalecki reminds us that economic stability cannot be separated from the question of whose interests it serves. A key component is ultimately developing increasingly sophisticated techniques for stabilizing capitalism and understanding why capitalism requires continuous stabilization.

A rise in interest rates may help reduce consumer demand in some areas, but money naturally chases allocations which earn ‘best’ returns. This is highlighted by businesses and financial markets where capital outflows seek profits and do not protect the Indian Rupee. Support for the INR provided by Non-Resident Indians inflows that has helped build the FX Reserves recently cannot be relied upon alone to fix the weakened Indian Rupee problem alone, nor can ‘simple’ fixes like the recent quarter of a point interest rate hike by the Reserve Bank of India. A coordinated and tactical policy is needed.