Mumbai: A decade into India’s inflation targeting regime, the Reserve Bank of India (RBI) has opened the door, albeit cautiously, to a possible recalibration of its inflation target and a tightening of the tolerance band in the next review cycle.
“If the mix of growth and inflation continues to develop as it has over the last 10 years — robust growth and lower, more stable inflation — perhaps we could consider adjusting the inflation level and the tolerance band a bit,” Deputy Governor Poonam Gupta said in a speech on Tuesday, adding that it could justify a slightly lower inflation target and a slightly narrower tolerance band.
But she cautioned, saying that if the global environment remains as challenging as it has been over the past six years, it would warrant the predictability and flexibility provided by the current framework.
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Gupta added that the RBI could further refine its approach, particularly in how it measures and monitors core inflation. “Bigger, better and more timely communication has been a work in progress and will continue to be so,” she said.
Nevertheless, she noted that the current regime has the necessary levers to further improve the country’s economic stability and growth outcomes. “Calibrated refinements supported by possible structural changes can maintain the framework’s relevance and suitability for years to come.”
The remarks follow the government’s decision on March 25 to maintain the 4% inflation target (with a tolerance band of +/- 2) for the next five years, extending the current mandate until March 2031.
Success in price stability
The RBI’s feedback on the framework has been largely positive. Since its formal adoption in 2016, inflation has moderated significantly, with average headline CPI inflation falling from 8.1% in the pre-targeting decade to 4.6% in the inflation targeting period. Equally important, volatility has fallen sharply while growth has remained resilient.
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“Price stability and growth have thus emerged as complementary rather than conflicting objectives in the Indian framework,” Gupta said in response to long-standing criticism of inflation targeting. 
The RBI review, based on public consultation and global evidence, strongly favored retaining the current framework architecture. Over 90% of respondents supported headline inflation as a target, while a similar proportion supported keeping the 4% target alone. 
In the tolerance band, about two-thirds of respondents favored maintaining the current +/- 2% range, citing its role in absorbing shocks such as the covid pandemic and the Russia-Ukraine war without undermining policy credibility. 
Globally, inflation targeting regimes have proven durable, with no country abandoning the framework after adopting it. Instead, central banks regularly adjusted targets and bands in response to evolving macroeconomic conditions.
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In this context, the RBI emphasized that continuing with the existing framework should not be mistaken for resistance to change. “The durability of the framework over the past decade reflects a willingness to learn from experience,” Gupta said.
