The Reserve Bank of India (RBI) is at a crossroads. On Thursday, it opened the floor for public feedback on whether its current inflation targeting framework should remain unchanged or be tweaked to prioritize growth while maintaining stability. The debate centers around whether the 4% retail inflation target is still the magic number for India’s rapidly growing economy or if new parameters should take its place.
Since 2016, India has followed a flexible inflation targeting (FIT) regime, with the RBI tasked to keep Consumer Price Index (CPI) inflation at 4% within a tolerance band of plus or minus 2%. This framework was initially set for a five-year period from 2016 to 2021 and later extended to 2026. But with global and domestic economic landscapes shifting dramatically, the RBI is questioning if this system still fits.
A six-member Monetary Policy Committee (MPC), led by the RBI Governor, sets the policy rates needed to hit this inflation target. But now, with the next review due in 2026, the central bank is re-evaluating its approach. Is 4% inflation still ideal for balancing growth and stability in an economy like India? Or should core inflation—which excludes volatile food and fuel prices—be the new benchmark?
The RBI has posed four key questions in a discussion paper. First, should headline inflation or core inflation guide monetary policy, considering food prices still dominate the CPI basket? Second, is the 4% target optimal for India’s growth trajectory? Third, should the tolerance band be adjusted—widened, narrowed, or even scrapped? And fourth, should the target itself be replaced with just a range, offering more flexibility without losing credibility?
Over the past nine years, the FIT framework has had its ups and downs. The first and last three years stayed close to the target, but the middle three saw inflation spike, thanks to the pandemic and the Russia-Ukraine war. Despite these shocks, the RBI argues the framework has largely worked, keeping inflation stable around 4% during non-crisis periods.
The paper highlights that since FIT was introduced, average inflation has dropped to 4.9%, compared to 6.8% in the pre-FIT era. But with global uncertainty looming, the RBI wants to ensure its policies stay credible and adaptable. Public feedback, due by September 18, 2025, will shape the final recommendations.
Inflation targeting itself isn’t new—New Zealand pioneered it in 1990, and it’s now a global standard. The RBI’s review isn’t about scrapping the system but refining it. Should India stick with what’s worked or tweak the formula to better suit its growth ambitions? The public now has a say in that decision.