ECONOMIC POLICY

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CBS LINE

Volume 3(10)


Is It Time to Rethink India’s Inflation Targeting Framework?

India formally adopted an inflation targeting (IT) framework in 2016, setting a target of 4% inflation with a tolerance band of ±2%. This policy aimed to maintain price stability through adjustments in the Reserve Bank of India’s (RBI) repo rate. Nearly a decade later, questions are being raised about whether this framework has truly been effective in achieving its objectives.

Recent analyses suggest that stable inflation in India may have been achieved more through fiscal prudence than through repo rate actions. The data shows a weak correlation between the repo rate and inflation trends (correlation coefficient of -0.43), indicating limited influence of monetary policy tools on price movements. Instead, fiscal measures such as tighter government spending, lower deficits, and better debt management appear to have played a more significant role in containing inflation.


A persistent challenge lies in food inflation, which continues to drive overall price levels. Since food accounts for nearly half of India’s Consumer Price Index (CPI) basket, inflation often stems from supply-side issues like poor harvests, logistics, and weather shocks which are beyond the reach of monetary policy. This limits the RBI’s ability to manage inflation solely through repo rate changes.

Globally, economies such as the US, UK, and Japan have adopted broader monetary policy goals that balance inflation control with employment and growth. India too may benefit from a more flexible and coordinated approach, aligning fiscal and monetary policies to manage both demand- and supply-side pressures.

Experts now suggest that India’s inflation targeting approach needs recalibration rather than abandonment. A revised framework could integrate fiscal and monetary coordination, focus on managing supply-side shocks, and prioritize long-term growth alongside price stability. Balancing fiscal discipline with realistic inflation targets could help India build a more resilient and inclusive macroeconomic environment.


Antony T Varghese

MSc in Econometrics and Financial Technology

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