BharatNotes What is Inflation Targeting?
Inflation targeting is a monetary policy regime in which the central bank publicly commits to achieving a specified rate of inflation, treating price stability as the overriding goal. India operates Flexible Inflation Targeting (FIT) — the Reserve Bank of India (RBI) aims for 4% Consumer Price Index (CPI) inflation while accommodating short-run growth and shock considerations within a 2%–6% tolerance band.
The framework acquired a statutory basis when the Finance Act, 2016 amended the Reserve Bank of India Act, 1934. The amendment made price stability the primary objective of monetary policy, named CPI (Combined) as the nominal anchor, and constituted a six-member Monetary Policy Committee (MPC) chaired by the RBI Governor to set the policy (repo) rate.
Key Features
| Element | Detail (as verified) |
|---|---|
| Anchor index | CPI-Combined, compiled by NSO/MoSPI (base revised to 2024=100, released 12 Feb 2026; earlier 2012=100) |
| Target | 4% CPI inflation |
| Tolerance band | 2% (lower) to 6% (upper) |
| Decision body | 6-member MPC (3 RBI + 3 Government-nominated); Governor has casting vote |
| Statutory basis | RBI Act, 1934 — Section 45ZA (target set every 5 years by Government in consultation with RBI); Section 45ZN (failure reporting) |
| Intellectual origin | Urjit Patel Committee report, January 2014 (CPI anchor + glide path) |
Current Status
The Central Government first notified the 4% target with the 2%–6% band on 5 August 2016, retained it in 2021, and — following the second statutory review — retained it again for 1 April 2026 to 31 March 2031 via a Department of Economic Affairs gazette notification (dated 25 March 2026).
Under Section 45ZN, if average inflation breaches the band for three consecutive quarters, the RBI must send a report to the Government explaining the reasons, remedial action, and an estimated time to return to target (within one month of failure). This was triggered for the first time in 2022, when CPI inflation stayed above 6% from roughly January to September 2022. As of the RBI MPC of June 2026, inflation was reported around the lower half of the band and the policy stance was broadly neutral (the repo rate stood at 5.25%, held unchanged with a neutral stance — RBI MPC, June 2026).
UPSC Angle
For Prelims, this is classic monetary-economics territory: the 2023 Prelims question — "With reference to the Consumer Price Index (CPI) in India, consider the following statements..." — links directly to the anchor used in inflation targeting. Know that the MPC targets CPI-Combined, not WPI.
For Mains (GS3), evaluate FIT's record: it has anchored expectations and brought statutory accountability, but critics argue a single CPI target underweights food-driven supply shocks and the growth objective. A strong answer pairs the legal architecture (Sections 45ZA, 45ZN) with the 2022 band breach and the 2026 renewal to show continuity of the framework.
Cross-link: For live MPC decisions and current CPI prints, see current-affairs coverage on Ujiyari.com.
