Government Retains Headline Inflation Target
Context:
The Central Government has decided to retain the existing inflation target for the next five-year period (2026–2031).
This follows a comprehensive review of the Flexible Inflation Targeting (FIT) regime, which has been the cornerstone of India’s monetary policy since 2016
The Inflation Target:
The headline Consumer Price Index (CPI) inflation target remains at 4%.
The framework includes a symmetric tolerance band of +/- 2%, meaning the actual inflation should ideally stay within the range of 2% to 6%.
Despite debates over whether "Core Inflation" (which excludes volatile food and fuel) should be used, the government has stuck with Headline CPI.
This is because food has a high share in the Indian consumption basket, and headline inflation better reflects the cost of living for the majority of the population.
The Monetary Policy Framework:
In May 2016, the Reserve Bank of India Act, 1934 was amended to provide a statutory basis for the FIT regime.
Monetary Policy Committee (MPC):
The MPC is empowered to determine the policy interest rate (Repo Rate) required to achieve the inflation target.
It consists of six members:
Three from the RBI (including the Governor as the ex-officio Chairperson)
Three external members appointed by the Government.
If the average inflation remains outside the 2–6% range for three consecutive quarters, it is deemed a failure.
In such a case, the RBI must submit a report to the government explaining the reasons for the failure and the proposed remedial actions.