Why in news?
The Government and the Reserve Bank of India (RBI) were due to review the inflation target for the Monetary Policy Committee (MPC) for the five‑year period starting in April 2026. India has followed a flexible inflation‑targeting framework since 2016, aiming to keep consumer price inflation at 4% with a tolerance band of ±2%. Recent supply shocks and global price volatility triggered debate on whether the target should be changed.
Why maintain a 4% target?
- Balancing growth and price stability: A moderate 4% target allows the economy to grow while keeping inflation expectations anchored. A much lower target could stifle growth, while a higher target risks eroding purchasing power.
- Credibility of the framework: Changing the target frequently may confuse households and investors. Keeping the same target for another five years signals policy consistency and helps the public plan savings and borrowing decisions.
- International practice: Most emerging economies target inflation around 3%–5%. India’s current band is comparable and recognises the structural factors affecting prices, such as monsoon variability and global commodity markets.
Headline versus core inflation
Headline inflation measures price changes for all goods and services, including food and fuel, while core inflation excludes these volatile components. Some experts suggest that the RBI should target core inflation because it reflects underlying demand conditions. However, India’s households spend a large share of their income on food, so ignoring food prices may weaken public trust. The MPC therefore looks at both measures but communicates policy based on the headline figure.
Key issues and challenges
- Supply shocks: Weather events, oil price spikes and global disruptions often push inflation above the target band. Monetary policy has limited ability to control such cost‑push pressures.
- Fiscal dominance: Large fiscal deficits and high government borrowing can constrain the central bank’s ability to raise interest rates without harming economic growth.
- Data limitations: Timely and accurate price data are crucial for policymaking. Updating the base year of the Consumer Price Index and improving rural price surveys will help refine forecasts.
Looking ahead
While the inflation target is likely to remain unchanged, the authorities must complement monetary policy with supply‑side measures. Improving agricultural productivity, diversifying energy sources and investing in infrastructure can ease price pressures. Closer coordination between the RBI and the Government is needed to ensure that fiscal policies do not undermine price stability. Clear communication from the MPC will continue to anchor expectations and protect the credibility of India’s inflation‑targeting regime.