Flexible Inflation Targeting in India: Review Issues
Why in the news
The current five-year cycle of the inflation-targeting framework closes in March 2026, so the RBI is reassessing it for the period up to 2030-31.
About FIT
- Introduced in 2016 through amendments to the RBI Act, 1934.
- Gives the RBI and the Monetary Policy Committee (MPC) a clear, forward-looking mandate for price stability while supporting growth.
- Target: 4% +/- 2%, i.e. a 2-6% band.
- Objectives: price stability, protecting the poor, encouraging savings and investment, sustaining growth.
Why it was introduced
- To tame persistently high inflation in 2008-2014.
- To move towards modern, rule-based monetary policy.
- To raise RBI transparency and accountability.
- To formally institutionalise the MPC.
Questions in the review
| Issue | Position discussed |
|---|---|
| Headline vs core | Rangarajan favours headline (includes food and fuel): food inflation can lift general prices through second-round effects such as wages; without wider liquidity expansion it only shifts relative prices |
| Acceptable level | Inflection point around 4%; below it growth is supported, above it savings, investment and growth suffer; little case for a higher target |
| Band | 2-6% gives room to absorb shocks; hovering near 6% for long defeats the purpose, and inflation above 6% has gone with lower growth |
Macroeconomic considerations
- Fiscal-monetary coordination: high inflation in the 1970s-1980s was tied to monetisation of the fiscal deficit; FIT works best alongside FRBM Act provisions.
- Policy must look ahead at fiscal and external pressures.
- FIT is a flexible yet disciplined way to hold prices stable while backing growth.
Exam angle
- Target and band: 4% with 2-6%.
- Statute amended: RBI Act, 1934.
- Related terms: headline inflation, core inflation, FRBM.