The Reserve Bank of India (RBI) is expected to recommend that the government retain the current 4% inflation target with a 2%-6% tolerance band, as part of an upcoming review of the country’s inflation targeting framework, according to sources familiar with the matter. This move, if finalized, would provide much-needed clarity to investors and markets, reinforcing policy continuity at a time of leadership changes within the central bank.

The RBI’s internal committee, which is leading the review process, is also in favor of continuing to use the Consumer Price Index (CPI) as the benchmark for inflation, rejecting calls from some officials to exclude food from the measure. Food accounts for nearly 46% of the CPI basket in India, making it a significant factor in consumer expenses.

“Food is an essential household expenditure and cannot be excluded from the inflation target,” said one of the people aware of the discussions.

Inflation Framework Review Underway

India’s inflation targeting framework, introduced in 2016, is reviewed every five years. The current structure—targeting 4% inflation with a 2% cushion on either side—remains valid until March 2026. The RBI’s internal committee is expected to submit its recommendations by September, following which the Ministry of Finance and RBI will jointly decide on the framework for the next term.

Despite occasional breaches—such as in 2022 when inflation spiked due to global energy and food price shocks—the RBI has largely managed to keep inflation within the specified band. This performance supports the case for retaining the existing framework rather than overhauling it.

Maintaining the current target “would eliminate uncertainty and bolster investor confidence in the continuity of India’s monetary policy,” said an official aware of the discussions.

CPI vs Core Inflation: Ongoing Debate

There is an ongoing debate within policymaking circles about whether headline CPI is the best measure for targeting inflation in India. Chief Economic Adviser V Anantha Nageswaran has argued for using a measure that excludes volatile food items, since food price swings are often driven by weather and supply disruptions, which monetary policy cannot control.

However, former RBI Governor Shaktikanta Das, and now the internal committee, have firmly rejected this view. The committee believes that even though the central bank may not control food supply, it can contain the second-round effects of food inflation through timely interest rate actions.

The RBI’s stance underscores the view that food inflation affects other sectors and consumer behavior, making it too significant to ignore in a developing economy like India.

A Recalibration of CPI Expected

While the RBI may retain the current CPI-based target, minor adjustments in the CPI basket are likely. The weight of food items in the index may be slightly reduced in the next consumer price review, but food will remain the largest component.

This balance is aimed at modernizing the inflation metric without undermining the relevance of essential household expenditures in monetary policy.

Why It Matters for Markets and Policymakers

The decision to retain the inflation target and CPI measure comes at a pivotal time. Governor Sanjay Malhotra, who took charge in December, surprised markets recently with a larger-than-expected rate cut, creating uncertainty about his approach to monetary policy. Finalizing a familiar inflation framework could restore clarity and anchor expectations.

India’s inflation targeting framework has drawn inspiration from global peers like the Bank of England and Reserve Bank of New Zealand. With this review, the country continues to strike a balance between global best practices and domestic realities.