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The government has instructed the RBI to maintain retail inflation at 4 per cent with a 2 per cent tolerance until March 2031, marking the second confirmation of this target since 2016. The CPI rose to 3.21 per cent in February. The RBI has reviewed the inflation framework ahead of the next five-year cycle, seeking feedback on whether headline or core inflation should guide policy, the relevance of the 4 per cent target, and possible adjustments to the tolerance band. India's flexible inflation-targeting framework has largely succeeded in stabilizing prices and maintaining policy credibility.
The government has directed the Reserve Bank of India (RBI) to continue maintaining retail inflation at 4 per cent, allowing a margin of 2 per cent on either side, for the next five years until March 2031. Advertisement
This decision marks the second time the government has confirmed the inflation target since it first set it in 2016. At that time, the RBI was mandated to keep retail inflation at 4 per cent with a 2 per cent tolerance, a target that was extended in March 2021 for another five-year period. The latest notification, issued by the Department of Economic Affairs, specifies an upper tolerance of 6 per cent and a lower tolerance of 2 per cent for the coming period.
India adopted the inflation-targeting framework in 2016, assigning the central bank the task of maintaining price stability. In the first meeting of the six-member Monetary Policy Committee (MPC) in October 2016, the committee was instructed to maintain annual inflation at 4 per cent until March 2021, within the defined tolerance limits. Over the past decade, inflation has stayed within this range for nearly three-quarters of the time, although volatility spiked during the pandemic years.
Recent data shows retail inflation in the country rose to 3.21 per cent in February from 2.74 per cent the previous month. The Consumer Price Index (CPI) for this period is based on a new series with a 2024 base year. The RBI Governor-led MPC determines the policy rates needed to achieve these inflation targets.
Ahead of the next five-year review starting April 2026, the RBI examined the structure and format of the inflation target in light of global and domestic economic developments. In August 2025, it released a discussion paper seeking feedback on several key points: whether headline or core inflation should guide monetary policy, if the 4 per cent target remains optimal for balancing growth and stability, whether the tolerance band should be adjusted, and whether only a range should be maintained instead of a fixed target.
The discussion paper highlighted that the flexible inflation-targeting (FIT) framework, in place since 2016, performed broadly well. Inflation remained aligned with the target during the first three and last three years, while the middle three years saw higher inflation due to the pandemic and the Russia-Ukraine conflict, which impacted global price trends. The FIT framework has helped maintain both policy certainty and credibility, which are crucial in today's uncertain economic environment.
Globally, inflation targeting is a widely adopted monetary framework, now 35 years old, first implemented by New Zealand in 1990. India's adoption of FIT has helped lower average inflation to 4.9 per cent since 2016, compared with 6.8 per cent in the pre-FIT period, demonstrating improved macroeconomic stability.
Source PTI
FAQ
Q1: What has the government instructed the RBI regarding retail inflation?
The government has directed the Reserve Bank of India (RBI) to maintain retail inflation at 4 per cent with a 2 per cent tolerance band, meaning inflation should ideally stay between 2 and 6 per cent, for the next five years until March 2031.
Q2: Has this inflation target been set before?
Yes, the target was first set in 2016 and extended in March 2021. The latest directive marks the second formal confirmation of this 4 per cent retail inflation target.
Q3: What is the current retail inflation rate in India?
Retail inflation, measured by the Consumer Price Index (CPI) based on the 2024 series, rose to 3.21 per cent in February 2026, up from 2.74 per cent in January.
Q4: What is the purpose of maintaining an inflation target?
The goal is to ensure price stability while supporting economic growth. By keeping inflation within a defined range, the RBI provides policy certainty, maintains market confidence, and prevents excessive volatility in prices.
Q5: How does the RBI implement this target?
The RBI uses its Monetary Policy Committee (MPC), led by the Governor, to adjust policy rates and other monetary tools as needed to keep inflation within the 4 per cent target and its 2 per cent tolerance band.
Q6: Has India's flexible inflation-targeting framework been effective?
Yes, the framework, in place since 2016, has largely succeeded in stabilising prices. Average inflation since adoption has been 4.9 per cent, down from 6.8 per cent in the pre-FIT period, demonstrating improved macroeconomic stability.
Q7: What was the RBI reviewing ahead of the next five-year cycle?
The RBI sought feedback on whether headline or core inflation should guide policy, whether the 4 per cent target is still optimal, whether the tolerance band needs adjustment, and whether a fixed target or just a range should be maintained.
Q8: How has global experience influenced India's approach?
Inflation targeting is a widely used monetary policy framework globally, first implemented in New Zealand in 1990. India's adoption of a flexible inflation-targeting (FIT) framework aligns with global best practices while considering domestic economic conditions.
Q9: Why is the tolerance band important?
The 2 per cent tolerance allows some flexibility to account for unexpected shocks, such as commodity price swings or global crises, without necessitating abrupt policy changes that could disrupt growth.
Q10: What role did the pandemic and global events play in India's inflation?
During the middle three years of the FIT framework, inflation was higher due to the COVID-19 pandemic and the Russia-Ukraine conflict, which affected global commodity prices and supply chains. These events highlighted the importance of a flexible yet credible inflation-targeting mechanism.
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