Reserve Bank of India (RBI) has affirmed the successful performance of the Flexible Inflation Targeting (FIT) framework:
The Reserve Bank of India (RBI) has affirmed the successful performance of the Flexible Inflation Targeting (FIT) framework in maintaining price stability. A recent discussion paper from RBI indicated that, since its introduction, inflation remained low and stable, averaging around 4% until the end of 2019. Post the Global Financial Crisis, India experienced a mix of persistently high inflation and sluggish growth, prompting debate on improving monetary policy credibility. Urjit Patel Committee Report (2014) recommended adopting Inflation Targeting with inflation as the nominal anchor for monetary policy. India formally adopted FIT in 2016 through amendments to the RBI Act, 1934. The adoption followed a Monetary Policy Framework Agreement signed between the Government of India and the RBI in 2015. Unlike strict inflation targeting, FIT allows short-term deviations from the target to accommodate supply-side shocks (e.g., food price spikes, fuel volatility), and economic crises (e.g., pandemic, war). It provides room to prioritize growth during downturns while returning to the inflation target path over the medium term. The 4% inflation target with a tolerance band of ±2% balances price stability and growth, aligning with global norms for emerging economies. Since adopting FIT in 2016, inflation volatility has decreased. The current band provides flexibility to absorb shocks from food, fuel, and global volatility, with 94% of inflation staying within this range.
