Government retains inflation target at 4% for another five years

The government has retained the medium-term inflation target at 4% for another five years with a tolerance band of 2% on either side, the finance ministry said in a gazette notification on Wednesday.

The move was widely expected as the Reserve Bank of India’s discussion paper in August on the forthcoming review of its flexible inflation targeting framework hinted at continuation of 4% target.

India has adopted the inflation-targeting framework in 2016, formally assigning the responsibility of maintaining price stability to the RBI through its Monetary Policy Committee. The current decision follows the second mandatory review of the framework, which is required every five years under the law. The previous review was conducted in 2021.

Inflation pressures in the economy are currently relatively subdued, with consumer price inflation easing to 3.21% in February. However, higher global commodity prices, particularly crude oil, along with ongoing geopolitical tensions, are expected to lift inflation above the 4% mark in the new financial year beginning April.

Over the past decade, the flexible inflation-targeting framework has largely achieved its core objective of keeping price pressures under control while providing clarity to markets. Inflation has moved outside the prescribed 2%–6% band for less than one-third of the time, with the sharpest deviations occurring during the pandemic when supply chains were severely disrupted worldwide.

The framework also builds in accountability. If the Monetary Policy Committee fails to keep inflation within the target range for three consecutive quarters, the RBI governor is required to explain the reasons to Parliament and outline corrective steps. Such a situation has arisen only once in the past decade, during the pandemic period.