WHERE AUSTRIAN ECONOMICS MEETS REAL WORLD ACTION

India's central bank cut rates and created money while food got cheaper. Money now grows far faster than output, and the bill arrives as dearer loans.

You run a small engineering firm on the edge of Pune. Forty people, two lathes older than your apprentices, and a working-capital line with your bank that has carried you through every slow quarter.

Last year your banker rang with good news: your rate was coming down. A few months later it came down again. You started pricing a new machine.

This month the letter is different. Your rate goes up at the next reset. And the committee that sets it has said there will be no cuts for now. The only choices left on its table are to hold, or to go higher.

You were going to order the machine in the new year, on the bet that borrowing would get cheaper. That bet is off. The question is who changed it, and why.

On 7 October 2026 the Reserve Bank of India's Monetary Policy Committee voted six to nil to raise the repo rate, the rate at which the central bank lends to banks overnight, by a quarter of a percentage point to 5.50%. It also changed its stance to "calibrated tightening", and explained what that means: rate cuts are "off the table in the near term", and the next move "can only be a rate hike or a pause". Two of the six members wanted to keep the stance neutral. The committee meets again on 2 to 4 December.

For millions of borrowers this is not a distant overnight rate. Since 1 October 2019 the RBI has required banks to link every new floating-rate home, car and personal loan, and every floating-rate loan to a micro or small enterprise, to an outside benchmark: the repo rate itself, a Treasury bill yield, or another published rate. Medium-sized firms followed from 1 April 2020. A loan on an outside benchmark must reset at least once every three months. The bank sets its margin above the benchmark when the loan is signed, and may raise it only if the borrower's credit changes substantially. After that, the part of the rate that moves is the committee's.

The committee's case deserves to be stated properly. Consumer prices rose 4.8% in the year to August, up from 4.5% in July, and core inflation, which leaves out the most volatile prices, "has also picked up". The committee expects inflation to reach 6.0% in October to December, the top of the band it is meant to stay within, and to average almost 5.8% over the next three quarters. Credit is growing fast: one member, Saugata Bhattacharya, said high credit growth had spread "into virtually all sectors and segments". Interest rates act with a delay, so the committee argues it must move before prices do.

And the economy it is managing is strong. Output grew 7.8% in April to June, faster than the RBI itself had forecast. A rate rise is the opposite of printing money, and savers will be paid a little more.

Take every word of that as true. What follows is unaffected.

Two economies, growing at different speeds

Every country has two economies, measured in different units. One is the economy of things: machines built, meals served, software written. The other is the economy of money: the rupees in bank accounts and wallets. Prices are where the two meet. A price is simply how many rupees change hands for one thing.

If things and rupees grow at the same pace, prices can stay roughly where they are. If rupees grow faster than things, more rupees chase each thing, and sooner or later each thing costs more of them. Here is how the two have grown in India.

What grew, and how fast

The top two rows are the economy of things: India is producing a lot more, and the gap between those two rows is the rise in the prices of what it produces, a little over 2%. The next two rows are the economy of money, and they are growing more than twice as fast as the goods that money can buy. The last row, consumer prices, is where the two meet.

The periods don't match exactly, because output figures come out later than money figures. The next ones are due on 30 November. But a gap this wide is not a matter of timing.

So where did the extra money go? Some of it is being held, as deposits waiting to be spent. Some went into things the consumer price index doesn't count, such as land, property and shares. And some hasn't reached everyday prices yet, because new money doesn't arrive everywhere at once. That last part is what the committee is now forecasting, when it expects inflation to reach 6%.

Ludwig von Mises, the Austrian economist who wrote most fully about money, treated inflation as the increase in the quantity of money itself, and rising prices as its consequence. On that definition, the 4.8% is the symptom. The 16.9% is the inflation.

Where the new money came from

The RBI's own tables show where the year's new money came from. (Indian figures are usually given in lakh crore; one lakh crore is one trillion rupees.)

Where a year's new money came from (year to 30 September 2026)

Almost four rupees in five came from the first row. When a bank makes a loan, it doesn't hand over someone else's savings. It credits the borrower's account with a new deposit, and that deposit is new money.

Banks could lend on that scale because, in 2025, the central bank made it cheap and easy. Food prices were falling and the price index was at a six-year low, so the committee had room to act, and it used all of it.

What the central bank did in 2025

Each row pushed in the same direction: more money, at a lower price. The third row is where the government comes in. It is the country's largest borrower, and it spends about a quarter of its budget on interest, so no one gains more from cheap money. With the central bank buying bonds equal to about half of what it planned to borrow, it borrowed more cheaply than savers alone would have allowed.

So the government is part of the story, but the first table shows it is not the largest part. Over the past year the bigger engine has been private credit, and the second table shows who fuelled it.

Why the price index missed it

In 2025 food got cheaper. The RBI pointed to a good monsoon, strong farm output and ample food stocks. That is real wealth: more food for the same work. Left alone, it would have shown up as lower prices, and every household would have shared the gain.

Instead, the low index became the reason to create money. Cheaper food and new money cancelled each other out on the gauge the committee watches. The index looked calm while the money supply sped up. The bill was deferred, not cancelled, and it is arriving now.

In India, the money was created in 2025. The price index is noticing it in 2026.

A price six people vote on

The committee doesn't only allow money to be created. Through the repo rate, and the 2019 rule, it also sets the base price of borrowing for every repo-linked loan in the country.

A rate of interest is a price like any other. It reflects how much savers value money today against money next year, and how much borrowers expect to earn by using it now. When many savers and borrowers bargain, the rate that results tells everyone how plentiful savings really are.

The committee can't see that rate, because it has replaced it. Bhattacharya estimated the "real natural rate", roughly the rate with no one steering it, at between 1.4% and 1.9% above inflation. A committee has to estimate as a range a number a market would simply show. Friedrich Hayek, another Austrian, argued in 1945 that the knowledge a price carries is scattered among millions of people, and that only a price free to form can gather it.

On the committee's own figures, the new rate of 5.50% is still below the almost 5.8% inflation it expects. Anyone earning the policy rate on their savings would still be losing ground. "Calibrated tightening" means credit is a little less cheap. It is still cheaper than the committee expects prices to rise.

And the order in which new money arrives matters. A firm that borrowed in 2025 spent the money at 2025 prices, on machines, land and stock. A worker paid in 2026 meets 2026 prices. Economists call this the Cantillon effect, after Richard Cantillon, the eighteenth-century writer who first described it.

Two objections

The first: Austrians always want higher rates, so why object to a rise? Because the objection was never to the level. It is to who sets it. A committee that raises the rate is still a committee setting it, still below its own forecast of inflation, and free to reverse course in December. Stopping the easing is not the same as having sound money.

The second is stronger: India is growing fast, and a growing economy needs more money. It doesn't. A growing economy needs prices that can fall as output rises. When more goods meet the same money, each rupee buys more, and the gain reaches everyone who holds rupees, including the saver and the wage-earner. That is what good harvests began to do in 2025. More money takes that gain and hands it to whoever receives the new money first.

What sound money would have done

Under money that no one can create at will, 2025 would have gone differently. Banks' lending would have been held in check by what savers were willing to deposit, and by the duty to pay out on demand in something no one can print. When demand for loans surged, the rate of interest would have risen by itself, telling borrowers that savings were scarce and telling savers that waiting was worth more. Cheaper food would have stayed cheaper. And the government would have had to borrow from savers at a rate they accepted, with no central bank in the market as a buyer.

Austrian economists differ on how such money should be organised. Some favour a commodity standard; others, currencies issued by competing private banks, each redeemable in something no one can print. What they share is the point that matters here: the quantity of money is not set by a vote, and neither is its price.

This is analysis, not legal, tax or investment advice. Check your own position with an adviser.

Let savers and borrowers set the price of credit. Remove the committee's power to set a policy rate, and the rule that ties loans to it. Each bank and borrower would agree a rate on the same terms, whatever the borrower's size: the 2019 rule's separate categories for small and medium firms go with it.

And take away the power to create money at will. Let money be something no one can expand by decision: a commodity, or private currencies that compete and are redeemable in one. Then a good harvest makes food cheaper and it stays cheaper, a surge in borrowing raises the rate by itself, and a government that wants to borrow must persuade savers to lend.

No committee would then need to estimate the right rate. Savers and borrowers would show it.

Stay free,

Jean-Pierre

The Austrian Actor

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