FIT is fit: We must retain India's inflation targeting framework

Stick with headline retail inflation as RBI's monetary-policy target but tighten the tolerance band

- SANTOSH KUMAR DASH & DINABANDHU SETHI

In 2016, the Reserve Bank of India (RBI) Act was amended to give flexible inflation targeting (FIT) statutory status. India's target was fixed at 4%, with a tolerance band of plus or minus 2%.

As the second five-year term of this framework comes up for review in March 2026, it is time to ask whether FIT has served India well and what may need to be refined.

Macroeconomic outcomes: Average inflation during 2010-2015—before FIT—was 8.7%. Since 2016, it has fallen sharply to 4.8%, the steepest fall among Asian peers that adopted FIT. Non-FIT economies show a patchy record on price stability—China, Hong Kong and Bangladesh managed modest declines, but Malaysia saw prices rise.

India has also reduced inflation uncertainty. Other Asian FIT adopters saw little success, with some even experiencing greater price swings.

The sustained decline in inflation and its volatility reflects better coordination between India's fiscal and monetary policies. In addition, favourable supply shocks and base effects have softened food and overall inflation. Further, global factors such as easing energy and core inflation coupled with monetary tightening further moderated price pressures. Importantly, this did not come at the cost of growth: our average real GDP growth held steady at 7.3% from 2016-17 to 2024-25 (excluding covid-year 2020-2021) versus 6.8% from 2012-13 to 2015-16. Despite disruptions like the GST rollout and covid, India's FIT framework has proven resilient.