RBI Floats Paper on Inflation Target Framework Review

Ahead of the second review of the country's flexible inflation targeting framework (FIT) due in March 2026, the Reserve Bank of India (RBI) on Thursday floated a discussion paper seeking feedback on four critical questions, including the appropriateness of persisting with the 4 per cent goal and if the focus should be on headline or core inflation.

- Manojit Saha

The paper also seeks inputs from stakeholders on whether the RBI should target a tolerance band or a specific number, and if the tolerance band of +/- 2 per cent should be narrowed or widened.

The FIT framework, which is in place since October 2016, is to be reviewed every five years. In the first review conducted in March 2021, the target was retained for the subsequent five years till March 2026. At present, the RBI Act mandates the central bank to maintain a Consumer Price Index (CPI) inflation target of 4.0 per cent with a tolerance band of +/- 2 per cent around it.

The discussion paper put up for review the question of whether the 4 per cent inflation target continues to remain optimal for balancing growth with stability in a fast growing, large emerging economy like India.

The paper observed that the experience of the FIT framework, introduced in the year 2016 and first reviewed in 2021 has broadly performed well. "On the whole, assessing the inflation performance over the nine years of FIT enunciates a humpshaped performance with the first three years and last three years remaining aligned to the target," it said.