Reserve Bank of India (RBI) released its discussion paper (August 2025) on reviewing the flexible inflation targeting (FIT) framework:
The Reserve Bank of India (RBI) released its discussion paper (August 2025) on reviewing the flexible inflation targeting (FIT) framework. With the current 4% CPI target within a 2–6% tolerance band expiring in March 2026, the RBI has cautioned that raising the target could dilute credibility and reverse policy gains.
Rationale for Retaining the 4% Target
- Credibility with Global Investors: Raising the target could be read as tolerance for higher inflation, weakening policy reputation.
- The recent S&P Global upgrade to BBB highlighted RBI’s inflation management as a pillar of investor confidence.
- Institutional Stability: The framework has built confidence in the MPC process and fiscal responsibility norms.
- Domestic Outcomes: Headline CPI inflation has largely stayed within the 2–6% band since 2016, reflecting policy success.
- The July 2025 figure of 1.55%, the second-lowest since the series began, is evidence of stability.
- External Balance: Low and stable inflation protects the rupee, maintains external competitiveness, and prevents erosion of capital inflows.
