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Inflation targeting: What works can still be tweaked to do better
Mint New Delhi
|September 03, 2025
Better data, an updated price forecasting model and a tighter fiscal rein can improve the framework
Inflation targeting has served India well over the past nine years. Among several pieces of supporting evidence are two that I usually prefer. One, Indian inflation was much higher than global inflation, and even inflation in comparable Asian countries, before India switched to inflation targeting. That gap has now narrowed. Two, price shocks in sectors such as food have generally not spilled over into the rest of the economy to morph into generalized inflation, a sign that economic agents have growing confidence that the Reserve Bank of India (RBI) will not allow prices to get out of control.
It is for reasons such as these that most economists have argued over the past week that the current system of monetary management does not need any major change. India's central bank posted a discussion paper on its website on 21 August calling for responses to four questions that need to be examined before the monetary policy framework is reviewed once again in March 2026. Should the preferred inflation target be in terms of headline or core inflation? Is the current inflation target at 4% optimal for a country such as India? Should the tolerance band on both sides of the inflation target be increased, decreased or done away with? Or should a point target be done away with in favour of only an inflation range?
This story is from the September 03, 2025 edition of Mint New Delhi.
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