The Reserve Bank of India (RBI) stands at a pivotal juncture, initiating a comprehensive public consultation on its inflation-targeting framework ahead of a mandated review in April 2026. This critical exercise aims to solicit diverse perspectives on whether to retain the established 4% inflation target with its 2 percentage-point tolerance band, a framework that has been in place since 2016. The consultation paper highlights a central debate among policymakers and economists: whether monetary policy should continue to focus on headline inflation or pivot towards core inflation, which excludes volatile food and fuel prices, amidst persistent price pressures.
- Public consultation on inflation-targeting framework launched.
- Reviewing the 4% inflation target and +/- 2% tolerance band.
- Considering a shift from headline to core inflation targeting.
- Framework established in 2016, next review due April 2026.
- Aims to gather diverse perspectives from stakeholders.
Key Areas of Consultation
India adopted the current inflation-targeting regime in 2016, assigning a 4% headline inflation goal to the RBI’s Monetary Policy Committee (MPC). The ongoing consultation, released by the central bank, specifically seeks feedback on three crucial areas: maintaining the 4% target, potentially revising or discarding the +/- 2% tolerance band, and the choice between targeting headline or core inflation, as reported by Reuters. This review follows a government paper from the previous year that advocated for a fresh appraisal, prompted by repeated spikes in food and vegetable prices which have significantly influenced headline inflation figures.
Headline Versus Core Inflation: A Central Debate
A primary contention in this review revolves around the merits of headline versus core inflation targeting. While food costs have frequently pushed headline inflation above the 4% target, core inflation has concurrently fallen to record lows, sometimes around 3%. This divergence has led some analysts to advocate for a greater emphasis on core inflation. However, the RBI’s discussion paper strongly cautions against this approach, emphasizing that ignoring food inflation would be “tantamount to being oblivious of the cost of living of the poor and its welfare implications.” The central bank notes that most countries, across various income levels and policy designs, primarily focus on headline inflation due to its direct impact on household budgets.
RBI’s Stance and Framework Defense
The RBI’s paper largely defends the existing framework, asserting its success in achieving disinflation and providing sufficient flexibility to respond to external shocks. Its analysis indicates that trend inflation has consistently hovered around 4% since the framework’s inception. Furthermore, the central bank has outlined potential risks associated with significant alterations to the current policy. Raising the target above 4%, for instance, could be perceived by investors as a weakening of the framework, while lowering it might be challenging to justify amid elevated global food prices. A move to solely rely on a target band without a specific point could be interpreted as a lack of commitment to inflation outcomes.
Monetary Policy Committee’s Perspective and Future Considerations
The six-member Monetary Policy Committee, comprising three RBI officials and three government-appointed external members, has maintained the repo rate at 6.5% for nine consecutive meetings, citing persistent food inflation as a key factor. External MPC member Shashanka Bhide underscored the importance of a comprehensive approach, stating that gauging underlying price pressures requires considering the full consumption basket. “If we use a partial basket for a target then it would not reflect the overall price pressures,” Bhide told Reuters, highlighting that core targets should still capture trends in food or fuel inflation if not their volatility. The ultimate decision on any modifications to the framework will rest with the government, in consultation with the RBI, as India navigates global trade uncertainties and a projected slowdown in economic growth from 8.2% last fiscal year to 7.2% this year.
Oliver brings 12 years of experience turning intimidating financial figures into crystal-clear insights. He once identified a market swing by tracking a company’s suspiciously high stapler orders. When he’s off the clock, Oliver perfects his origami… because folding paper helps him spot market folds before they happen.