Inflation targeting: Reflect, don’t celebrate

The Reserve Bank of India’s (RBI’s) decision to seek public comments on its inflation-targeting framework is welcome.

- PRASANNA TANTRI

The Reserve Bank of India's (RBI's) decision to seek public comments on its inflation-targeting framework is welcome. Consultation is healthy-but before making changes to the framework, we should first ask: How well has the regime worked? The RBI's discussion paper (August 2025) declares flexible inflation targeting (FIT) a success. It notes that average inflation fell from 6.8 per cent pre-targeting to 4.9 per cent afterwards, with the pandemic and RussiaUkraine shocks pushing it up temporarily. Overall, the RBI concludes that FIT has served India well.

To judge how well FIT has worked, we must first ask how inflation was lowered. There are essentially two routes to lower inflation: The hard way keeping real rates high long enough to restrain demand and creditand the smart way-anchoring expectations so inflation declines with smaller output losses. Expectations typically anchor only after credibility is earned through consistent, firm action. As the discussion paper says, India's numbers do show disinflation. The harder question is which route the RBI followed. Did inflation fall because expectations were credibly anchored-the "smart" pathor because real rates were kept high, the "hard" path?

If FIT worked as intended, expectations would be stable around 4 per cent even when actual inflation moves. The test is whether expectations have decoupled from realised inflation. They have not.

Another force was fiscal consolidation. Lower deficits and prompt supply-side actions helped stabilise prices and, notably, fiscal discipline was maintained even through election cycles, a rare feat. This steadiness matters for credibility: It signals that price stability is a shared goal, not just a monetary task.