Mumbai: India’s central bank, the Reserve Bank of India (RBI), is expected to recommend maintaining its current inflation targeting framework for a third consecutive term, sources familiar with the matter told Reuters. The flexible inflation targeting system mandates a 4% headline consumer price inflation target, with a tolerance band ranging from 2% to 6%. This recommendation comes ahead of the March 2026 review, when the current mandate is set to expire.
The RBI solicited feedback from economists, market participants, and other stakeholders to evaluate the effectiveness of its existing policy. According to sources, most respondents expressed support for continuing the current framework, highlighting its stability and effectiveness even during periods of economic volatility. A senior source noted, “There have been no big changes that are sought. Most feel the framework has worked quite well.” While minor adjustments in policy communication could be considered, the core structure is expected to remain unchanged.
Introduced in 2016 and last renewed in 2021, the inflation targeting framework has successfully kept retail inflation within the mandated band for roughly three-quarters of the time over the past decade, with spikes largely attributed to pandemic-related disruptions. Analysts like A. Prasanna of ICICI Securities and Radhika Rao of DBS Bank emphasized the importance of maintaining the 4% target with the existing tolerance range, noting that India’s unique economic structure, especially the high share of food and fuel in the CPI basket, warrants a wider band than seen in many developed markets.
A significant debate during the review has been whether to shift focus from headline inflation to core inflation, which excludes volatile food and fuel prices. While some stakeholders suggested giving more weight to core inflation, RBI officials largely favored retaining headline CPI as the primary target. Experts argue that, in India, food and fuel prices constitute over half of the consumer price basket, and fluctuations in these segments eventually influence broader inflation through second- and third-round effects.
Looking ahead, the consumer price index (CPI) basket is scheduled for review next year, with food weightage expected to decline slightly, potentially reducing inflation volatility. The RBI’s commitment to headline inflation targeting reflects a careful balance between ensuring price stability and supporting economic growth, as India continues to strive for faster expansion compared to developed economies.
The decision underscores the RBI’s cautious approach, emphasizing continuity in monetary policy while remaining responsive to structural changes in the economy and evolving inflation dynamics.