Monetarism

The theory

Monetarism, associated above all with Milton Friedman, holds that the quantity of money in an economy is the primary driver of inflation and economic activity. Friedman's famous line — "inflation is always and everywhere a monetary phenomenon" — captures the core claim: print too much money and prices rise. The policy prescription that follows is steady, predictable growth in the money supply, rather than central bankers actively fine-tuning interest rates.

India's monetarist phase, and its end

India once put this into practice. From the mid-1980s, the RBI explicitly targeted growth in M3 (broad money) as its way of controlling inflation — a textbook monetarist framework. But the approach was abandoned as the relationship between money supply and inflation grew unreliable in a liberalising, financialising economy.

In 2016, India formally adopted flexible inflation targeting, where the RBI aims for CPI inflation of 4%, within a tolerance band of 2% to 6%, and pulls the repo rate as its main lever rather than steering money-supply growth. M3 is now a watched indicator, not a target.

Where it stands today

The framework remains under active debate. The RBI released a discussion paper reviewing whether the 4% target and the 2-6% band should continue. Meanwhile the practical tool is clearly the policy rate: the RBI cut the repo rate by 100 basis points through 2025 as inflation cooled, with retail CPI at one point falling to around 2%. None of this is monetarism — it is interest-rate-based inflation targeting.

Why it still matters

Monetarism's legacy is the modern obsession with credible, rules-based central banking and the link between loose money and inflation — ideas that survive even though the strict money-supply targeting did not. For an investor, the practical descendant is simple: watch the repo rate and the inflation print, not M3 growth. The RBI today manages the price of money, not its quantity, but the underlying worry monetarism raised — that excess money erodes the value of your savings — is exactly why an inflation target exists at all.