Why in News
RBI Deputy Governor Poonam Gupta stated on May 5, 2026 that India could consider lowering the inflation target and trimming the ±2% tolerance band in the 2026 five-year review of the Flexible Inflation Targeting (FIT) framework, if GDP growth remains robust and inflation remains more stable. The current target is 4% CPI with a ±2% band (2%–6%). The 2026 review is the framework’s second since adoption in 2016.
India’s Flexible Inflation Targeting (FIT) Framework
Legal Basis
| Feature | Detail |
|---|---|
| Legal authority | Section 45ZA of the Reserve Bank of India Act, 1934 (inserted by Finance Act 2016) |
| Inflation target set by | Central Government (in consultation with RBI) — not by MPC or RBI alone |
| Review frequency | Every 5 years (or when target is missed for 3 consecutive quarters) |
| Current target | 4% CPI with ±2% tolerance band (2%–6%) |
| Previous target period | 2016–2021; 2021–2026 |
| Current period | 2021–2026 (being reviewed now) |
| Inflation metric | Consumer Price Index (CPI) — Combined (headline inflation) |
Monetary Policy Committee (MPC) — Composition
| Member | Category |
|---|---|
| RBI Governor | Member + Chair (casting vote if tied) |
| RBI Deputy Governor (in charge of monetary policy) | Member |
| One RBI official nominated by Central Board | Member |
| Three external members nominated by Central Government | Members (4-year term, non-renewable) |
Total: 6 members — 3 from RBI, 3 external. Decisions by majority vote.
What Are the Proposals?
Option 1: Lower the Target (from 4% to ~3.5% or 3%)
- Rationale: India’s CPI inflation has averaged closer to 5%+ historically; but recent moderation (FY26 average: ~4.3%) and strong growth suggest a lower target is achievable
- Risk: Tighter monetary policy required to hit lower target → higher interest rates → slower growth
- International comparison: US Fed target: 2%; EU: 2%; UK: 2%; India’s 4% was always a higher-than-advanced-economy target reflecting structural food inflation
Option 2: Narrow the Band (from ±2% to ±1.5% or ±1%)
- Rationale: A tighter band signals more policy precision and commitment
- Risk: MPC loses flexibility to tolerate supply shocks (e.g., food price spikes from monsoon failure); more frequent policy rate changes needed
- Consequence: If inflation touches 5.5%, it would be a “failure” under a ±1.5% band (vs current 6% threshold)
Historical Performance under FIT
| Year | Average CPI | Status |
|---|---|---|
| 2016–17 | 4.5% | Within band |
| 2019–20 | 4.8% | Within band |
| 2020–21 | 6.2% | Breached upper band |
| 2022–23 | 6.7% | Breached upper band — declared failure |
| 2023–24 | 5.4% | Within band |
| 2024–25 | 4.8% | Within band |
| FY26 projection | 4.6% | Within band |
MPC “Failure” Rule: If inflation remains above 6% or below 2% for three consecutive quarters, RBI must report to Parliament explaining why and what it will do.
In 2022–23, RBI sent a report to Parliament — the only time the failure clause was triggered.
Why This Matters for UPSC
Monetary Policy Transmission
- RBI’s repo rate decisions are the primary tool to keep inflation within the target
- A lower target → higher real interest rates → less credit, slower investment
- A narrower band → more frequent repo rate changes → greater volatility in borrowing costs
Growth-Inflation Trade-off
- India needs ~7–8% GDP growth for employment absorption
- Excessively tight inflation targets can suppress growth
- The 2026 review must balance India’s development stage with monetary credibility
UPSC Relevance
| Paper | Angle |
|---|---|
| GS3 — Economy | Monetary policy, inflation targeting, MPC, RBI Act, CPI vs WPI |
| GS3 — Economy | Repo rate, reverse repo, LAF corridor, monetary transmission |
| GS2 — Governance | RBI autonomy vs government, MPC composition, parliamentary accountability |
Mains Keywords: Flexible Inflation Targeting, Section 45ZA RBI Act, MPC, CPI inflation target, 4% target, ±2% tolerance band, Poonam Gupta RBI, five-year review 2026, monetary policy credibility, growth-inflation trade-off, repo rate
Prelims Facts Corner
| Item | Fact |
|---|---|
| FIT legal basis | Section 45ZA, RBI Act 1934 (Finance Act 2016) |
| Inflation target set by | Central Government (in consultation with RBI) |
| Current target | 4% CPI ± 2% (band: 2%–6%) |
| Review frequency | Every 5 years |
| MPC members | 6 total: 3 RBI + 3 government nominees; RBI Governor chairs |
| MPC “failure” trigger | Inflation above 6% or below 2% for 3 consecutive quarters |
| Inflation metric | CPI-Combined (Headline CPI) |
| 2022–23 | MPC sent failure report to Parliament (CPI avg: 6.7%) |
| RBI DG who raised revision | Poonam Gupta |
| FY27 RBI CPI projection | 4.6% |
