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Inflation targeting in India: target, band and legal framework
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Inflation targeting is a way of running monetary policy in which the central bank is given a numerical inflation goal and judged against it. India adopted a flexible inflation targeting framework in 2016: the RBI aims to keep consumer price inflation at 4% with a tolerance band of plus or minus 2 percentage points, that is, between 2% and 6%, while keeping an eye on growth. The index used is the combined CPI.
How the framework was built
- Urjit Patel Committee (2014) recommended moving from a multiple-indicator approach to CPI-based inflation targeting.
- Monetary Policy Framework Agreement (February 2015) between the Government of India and the RBI set out the objective.
- RBI Act amendment (2016) gave it legal force and created the Monetary Policy Committee to set the policy rate.
The Central Government, in consultation with the RBI, notifies the inflation target once every five years. The first period ran to March 2021 and the second to March 2026. The target and band for the current period are in the government's notification, so confirm them on rbi.org.in instead of taking any figure from memory.
What counts as a failure
The RBI is judged to have failed if average inflation stays above the upper limit or below the lower limit for three consecutive quarters. It must then send the government a report explaining the reasons, the action it proposes and the time it will take to return to target. This has happened once, when inflation stayed above the band through 2022 and the MPC held a special meeting in November 2022.
Why "flexible"
The RBI does not chase the 4% number mechanically. The band lets it look through temporary shocks such as a vegetable price spike, and the law asks it to support growth as long as price stability is not threatened.
How bank exams ask about it
Questions focus on the numbers (target, tolerance band), the committee behind it, the index used, and the three-quarter rule. A quick contrast also appears: before the framework, policy tracked several indicators including WPI (WPI inflation). Revise it in the economy block of banking awareness, and check RBI Grade B Phase II scope in the RBI Grade B guide.
Frequently asked questions
Which inflation index does the RBI target?
The combined (rural plus urban) Consumer Price Index published by the National Statistical Office.
Who sets the inflation target?
The Central Government, with the RBI, once every five years.
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