RBI Releases Discussion Paper on Monetary Policy Framework

The Reserve Bank of India (RBI) has released a discussion paper to review the current Monetary Policy Framework (MPF), inviting feedback from stakeholders on key aspects of India’s inflation-targeting regime. The central bank has sought responses by September 18.

The RBI has raised critical questions:

• Should the 4% CPI inflation target be retained as the benchmark?

• Does the current tolerance band of 2–6% remain suitable, or should it be revised or removed?

• Should monetary policy focus on headline CPI or core CPI?

The discussion also explores whether India should move from a fixed target to a range-based target, though the RBI cautioned that such a shift may reduce credibility and create ambiguity in interpretation.

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Background and Trends

India adopted the flexible inflation targeting framework in 2016, with a CPI target of 4% within a 2–6% band. Since then, inflation has stayed within the lower 2–4% range in 11 quarters, the 4–6% range in 14 quarters, while breaching the upper limit nine times—mostly during 2020–2022.

The RBI highlighted that if India had chosen a 4–6% range instead of the fixed 4% target, policy “failures” would have been recorded more often.

Market Insights

The paper indicates that headline CPI may be a better benchmark than core inflation, as food and fuel account for over half of India’s CPI basket. Policymakers believe ignoring these components would not reflect the true cost of living.

Key Insights

• RBI seeks feedback on retaining the 4% CPI target.

• Debate on headline vs core CPI continues.

• Credibility and flexibility of the framework are under review.

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