On Wednesday, the government notified that it would continue with the 4 per cent inflation target for the Reserve Bank of India (RBI) between April 1, 2026, and March 31, 2031, give or take 2 per cent.
The move marks the second consecutive review in which the existing target has been retained under the framework of flexible inflation targeting (FIT).
The framework came into effect on October 1, 2016.
The framework is subject to review every five years, and was retained in March 2021 for the period that is to end this month.
“The decision indicates the government believes the new CPI series is aligned with the earlier one in terms of the headline number. Hence, no change has been suggested,” said Madan Sabnavis, chief economist, Bank of Baroda.
Economists also said retaining the framework provided continuity to monetary policy.
“It is a good move. The current framework gives the RBI the flexibility to navigate supply-side shocks,” said Gaura Sen Gupta, economist, IDFC First Bank.
She added the +/-2 per cent band allowed the central bank to factor in supply-side disruption while remaining supportive of growth, with the 4 per cent target ensuring that policy did not turn restrictive.
The review comes after the RBI, in August last year, issued a discussion paper seeking feedback on key aspects of the framework, including the appropriateness of the 4 per cent target, whether policy should focus on headline or core inflation, and if the tolerance band should be altered.
The paper also sought views on whether the central bank should target a specific number or continue with a range.
The FIT framework came following amendments to the RBI Act, 1934. The framework mandates price stability as the primary objective of monetary policy and established the Monetary Policy Committee (MPC), another institutional change, a shift from a governor-centric monetary policy to a collegial approach of decision making.
The six-member MPC, comprising three RBI officials and three external members appointed by the government, sets policy rates through majority voting, with the governor holding the casting vote in the case of a tie.
There are 26 countries in the world, including three advanced economies, which have a point target with a tolerance band in their inflation targeting.
A major country that has adopted inflation targeting has never abandoned it.
The framework also includes an accountability mechanism by which the RBI explains deviations if the inflation rate breaches the tolerance band for three consecutive quarters.
Over time, the central bank has strengthened its analytical and communication processes, including publishing MPC minutes, voting patterns, and inflation projections, as part of efforts to improve transparency and policy credibility.
 "Inflation, CPI")