Status Quo or Change?

Retail or Core Inflation as the Target for RBI in the Next Five Years

- Dr. T. K. Jayaraman

The Reserve Bank of India (RBI) has announced a review of the current framework for setting its policy interest rate—the REPO rate (repurchase rate for authorized securities from commercial banks and other financial institutions). The REPO serves as the central policy tool for regulating money supply, making borrowing either costlier or cheaper across the economy. It acts as a guiding signal for consumption, savings, and investment decisions in the short, medium, and long term.

The adoption of a credible monetary policy requires a clear inflation target to anchor expectations. This was recognized in 2014 by a committee chaired by then Deputy Governor Dr. Urjit Patel, which recommended adopting a flexible inflation targeting (FIT) framework. At the time, India faced the dual challenge of persistently high inflation and sluggish growth in the aftermath of financial crises dating back to the late 1990s.

The FIT framework—globally acknowledged as a tool for macroeconomic stability and growth—was formally adopted in 2016 through amendments to the RBI Act, 1934. The agreement between the Government of India and the RBI set an inflation target of 4% (year-on-year, measured monthly), with a tolerance band of ±2%.

This framework allows short-term deviations to absorb supply shocks such as food and fuel price spikes or crises like the pandemic and geopolitical conflicts. By accommodating these shocks, the framework enables growth during downturns while ensuring a return to the target over the medium term.

RBI and Government: Shared Responsibility