The Reserve Bank of India (RBI) on Thursday released a discussion paper on the review of the Monetary Policy Framework (MPF), inviting stakeholder feedback on key questions that could shape the future of India’s inflation targeting regime. Comments have been sought by September 18.The central bank has asked whether the 4% inflation target remains optimal for balancing growth with price stability, if the tolerance band of 2–6% should be revised or removed, and whether monetary policy should be guided by headline or core consumer price inflation (CPI). The RBI has also sought views on whether a fixed target level should be replaced with a range.
In its paper, the RBI cautioned that shifting to range targeting could create ambiguity, as members of the Monetary Policy Committee (MPC) may interpret the mid-point differently. Such a shift could also be seen as diluting the commitment to price stability, potentially eroding policy credibility. “This could be inconsistent with the trend inflation, which is estimated to be close to 4%,” the RBI noted.The flexible inflation targeting framework was adopted in 2016, with the government setting the CPI target at 4% within a tolerance band of 2–6%. The framework was reviewed and retained in 2021 for another five years, ending March 2026. Since its implementation, CPI inflation has stayed within the lower 2-4% band in 11 quarters, and between 4-6% in 14 quarters, while breaching the upper limit in nine quarters, largely during 2020–2022.Also Read: RBI MPC minutes: Inflation may edge up despite recent softeningThe paper highlighted that if India had opted for a range of 4-6% in 2016, policy “failures” would have been recorded on three occasions, compared to only one under the current regime, due to undershooting the lower bound.On the tolerance band, the RBI noted that flexibility has allowed policymakers to manage trade-offs, especially during the pandemic when growth took precedence despite inflation remaining above target. A narrower band, however, could enhance credibility by anchoring expectations more firmly.Another critical question raised is whether headline inflation or core inflation should guide policy. While some argue that food inflation is supply-driven and outside the direct scope of monetary policy, former governor Shaktikanta Das had stressed in 2024 that excluding food would “make no sense to the average citizen” since headline inflation reflects the cost of living most accurately.Also Read: RBI MPC minutes: Policymakers flag caution; external uncertainty, tariffs remain key risksThe RBI concluded that food and fuel, which together make up more than 50% of the CPI basket, cannot be ignored when anchoring expectations. Headline CPI, it said, may therefore be the more appropriate benchmark.
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