The Reserve Bank of India (RBI) is conducting a comprehensive review of its Flexible Inflation Targeting (FIT) framework as the statutory five-year review deadline approaches in 2026. Introduced in 2016 under amendments to the RBI Act, the FIT framework mandates the Monetary Policy Committee (MPC) to maintain CPI inflation at 4% with a tolerance band of ±2% (i.e., 2% to 6%).
The current review, reported by The Hindu and Indian Express, is examining several contentious issues: whether the 4% headline CPI target remains appropriate given structural changes in the Indian economy; the ongoing debate between targeting headline inflation versus core inflation (which excludes food and fuel); the question of monetary policy independence from fiscal dominance; and whether the tolerance band should be widened or narrowed.
The headline vs. core debate has gained prominence because food inflation — which carries about 39% weight in India's CPI basket — is often supply-side driven and not directly amenable to monetary policy tools. Critics argue that raising interest rates to combat food price spikes hurts growth without meaningfully reducing food inflation, which is better addressed through supply management policies.
The FIT framework replaced the earlier multiple indicator approach and gave the RBI a clear, legally binding mandate. Since its implementation, India has largely kept inflation within the 2–6% band, with notable exceptions during COVID-related supply disruptions (2022–23) when inflation breached the upper tolerance limit for several consecutive quarters.
The 5-year statutory review will be conducted jointly by the RBI and the Ministry of Finance, with the outcome potentially reshaping the monetary policy framework for the next five years. Possible outcomes include keeping the 4% target unchanged, adjusting the band, or shifting toward a core inflation target to reduce the impact of supply-side shocks on monetary policy decisions.