10 years of the inflation targeting framework: What lies ahead next?

As RBI reviews its inflation-targeting framework ahead of 2026, former MPC members back the 4% CPI target, saying the model has anchored expectations despite global shocks

The Flexible Inflation Targeting (FIT) framework, which the Reserve Bank of India (RBI) follows to conduct monetary policy, came into effect on October 1, 2016. The target and the band, in terms of Consumer Price Index (CPI), is determined by the government once in five years and the second five-year period ends on March 31, 2026. In both the five-year phases, the target was 4 per cent, with 2 per cent variation on either side. Four former members of the RBI’s Monetary Policy Committee — Chetan Ghate, Ashima Goyal, Janak Raj, and Mridul Kumar Saggar — speak to AK Bhattacharya about the road ahead for the inflation targeting framework at the Business Standard BFSI Insight Summit 2025. Edited excerpts:

 

If you look at the performance of inflation targeting, the first five years up to 2019 went very well, but there were serious problems in the second five-year period because of exogenous shocks. What is your view of the 10 years of the MPC framework, from your personal involvement, and from observing it from outside? 

CHETAN GHATE: I am a strong supporter of inflation targeting. Let’s look at the obvious benefits. Inflation has tumbled in the last 15 years. Sceptics will say this is regression to the mean, and question whether inflation targeting itself was responsible. But apart from the debate on average inflation levels, success must also be judged by whether a credible nominal anchor has been established. 

Before inflation targeting, we followed a multiple indicator approach. The RBI looked at many indicators, and markets did not understand what the central bank was doing. Now, we have gravitated to a system where headline inflation is the nominal anchor. That clarity matters. 

Second, inflation targeting has helped anchor inflation expectations. Third, volatility of key macroeconomic variables like inflation and output has declined. And fourth, the credibility premium has risen. This shows up in financial markets. In 2018, during a tightening cycle, 10-year bond yields went to around 8 per cent. In the recent tightening cycle, they went to around 6.5 per cent. That difference reflects credibility. 

Now on criticisms. The core versus headline debate has gained traction, partly due to the Economic Survey. The argument is that monetary policy should target core inflation because headline inflation includes volatile components like food that monetary policy cannot influence, and that targeting headline raises rates and hurts farmers. 

Farmer welfare is important. But the appropriate tools for that are fiscal policy and transfers, not monetary policy. Monetary policy is a general policy, not sectoral. There is an argument that headline inflation converges to core inflation. If that is true, one might argue for targeting core. But a lot of academic work shows the opposite — that core inflation moves towards headline because food price shocks feed into wages and second-round effects. That suggests headline inflation should remain the target. There is also debate on whether 4 per cent is the right midpoint. The discussion paper does substantial work here. Historically, core inflation in India has been around 4 per cent. Headline inflation is volatile, vegetable inflation moved from 40 per cent in 2024 to minus 20 per cent in October 2025. Despite volatility, a symmetric band around a point target helps signaling. The 4 per cent target is also justified by productivity differentials with advanced economies. My broad answer is that inflation targeting was a major structural reform, supported by prior financial sector reforms that made it easier to implement. After 10 years, it has largely been a success and does not require a major rethink.

 

If core and headline inflation converge anyway, why not target core, especially given the supply-side shocks? 

GHATE: Supply shocks are difficult to identify in real time. Repeated supply shocks feed into wages and pricing decisions, and then into core inflation. That is precisely why ignoring headline inflation can be risky. 

ASHIMA GOYAL: There are two broad views. One, common among market participants, is that the RBI primarily affects prices, inflation targeting works, and it has worked well. The second view is that inflation in India is largely driven by food prices, which the RBI cannot affect, and that inflation targeting hurts growth. 

My own view is that flexible inflation targeting is extremely important. The canonical model comes from advanced economies with mature financial markets. In India, inflation targeting was adopted after a period of high inflation where food inflation affected wages and became persistent. It was introduced relatively quickly, without sufficient domestic debate to reconcile these perspectives. This review is an opportunity to explain how inflation targeting can be adapted to an economy like India.

Looking at data, inflation targeting has reduced average inflation from around 8.5 per cent historically to about 5 per cent. But growth outcomes matter too. Periods when real interest rates exceeded around 1.5-2 per cent, such as 2018 and 2024, saw growth slowdowns. That implies growth sacrifice when real rates remain too high for too long. 

The answer is not abandoning inflation targeting. Even before inflation targeting, periods of high inflation also hurt growth. What we need is flexibility. 

On core versus headline, I broadly agree that headline should remain the target because food inflation affects welfare. But RBI should also communicate core inflation forecasts. 

JANAK RAJ: I will divide my remarks into three parts: the framework, performance over 10 years, and the way forward.

India adopted flexible inflation targeting in October 2016, moving away from a multiple indicator approach that lacked a clear nominal anchor. The 4 per cent target provided that anchor. 

Flexibility means accounting for growth and financial stability concerns. The plus/minus 2 per cent band and the provision that accountability applies only after inflation exceeds 6 per cent for three consecutive quarters embed flexibility. 

Up to 2019, average inflation was close to 4 per cent. Then came Covid-19, fiscal dominance, the Ukraine war, and capital outflows. Despite these shocks, average inflation has been around 4.8 per cent. The RBI consciously allowed some deviation to protect growth, given the magnitude of shocks. Going forward, excluding food from the target is not advisable. Food matters for households, and excluding it would undermine communication and expectations anchoring. 

MRIDUL KUMAR SAGGAR: Post-pandemic, inflation is again mean-reverting around 4 per cent. While some countries like Brazil have lowered targets, this is not the stage for India. Any review should retain the same target. Frankly, I’m puzzled why the Reserve Bank put out a monetary policy framework review. It damages the credibility of the framework. This should have been called an inflation-targeting review. If you call it a monetary policy framework review, then you open up questions like multiple indicators, exchange rate targeting, and so on. By launching that debate, we are underplaying the success of the existing system. On core inflation, there is no case for it. Except for the Bank of Thailand, which experimented with it from 2000 to 2014 and burnt its fingers, no central bank uses core inflation as the target. Even advanced economies don’t.