Key Terms & Concepts — UPSC Mains
Flexible Inflation Targeting
"India's monetary policy framework anchoring the RBI's policy rate decisions to a 4% CPI inflation target with a 2-6% tolerance band"
Flexible Inflation Targeting (FIT) is India's monetary policy framework, adopted in 2016 through amendments to the RBI Act, 1934 (Sections 45ZA, 45ZB, 45ZC). Under FIT, the Central Government sets a headline CPI inflation target — currently 4% with a tolerance band of plus or minus 2 percentage points (i.e., 2-6%) — and the RBI's Monetary Policy Committee (MPC) sets the policy repo rate to achieve this target. The framework was recommended by the Urjit Patel Committee (January 2014) and replaced the RBI's earlier multiple-indicators approach. The target is reviewed every five years; it was retained at 4% for 2021-2026 and again for 2026-2031.
FIT is one of the most frequently tested monetary policy topics in UPSC Prelims and Mains. Understanding the Urjit Patel Committee recommendations, the statutory basis (Section 45ZA), the role of MPC, the distinction between headline and core inflation, and the performance of FIT since 2016 is essential for GS-3 (Indian Economy).
- 1 Recommended by Urjit Patel Committee (January 2014)
- 2 Statutory basis inserted via RBI Act amendment in May 2016
- 3 Target set by Central Government under Section 45ZA
- 4 Current target retained at 4% (tolerance 2-6%) for 2026-2031
- 5 If inflation exceeds 6% or falls below 2% for three consecutive quarters, RBI must explain failure to government
- 6 Average CPI inflation fell from ~6.8% (pre-FIT) to ~4.9% (post-FIT)
In March 2026, the government notified the retention of the 4% CPI target for 2026-2031, marking the second consecutive review where the existing FIT framework was retained unchanged.