RBI panel likely to recommend govt retain current 4% inflation target

By Admin

02 Jul, 2025

By Anup Roy and Bhaskar Dutta

In a move that signals policy stability and consistency, an internal committee of the Reserve Bank of India (RBI) is expected to recommend maintaining the current inflation target of 4%, with a tolerance band of 2%-6%, in the upcoming government review. According to individuals familiar with the matter, this decision would help assure investors of the central bank’s commitment to a predictable and credible monetary policy framework.

Reaffirming the Current Framework

The current inflation targeting regime, implemented in 2016, has been instrumental in managing inflation volatility even during global supply shocks and geopolitical disruptions. The committee, which prefers to keep discussions confidential at this stage, supports continuing with the Consumer Price Index (CPI) as the benchmark measure. This stance opposes suggestions from some government officials to adopt a metric that excludes food prices, arguing that food-driven price fluctuations are beyond central bank control.

Divergent Views on Headline CPI

The debate over CPI’s suitability as the anchor for inflation targeting is not new. With food prices accounting for nearly 46% of India’s CPI basket, critics argue this index may not be the most reliable indicator for monetary policy in a developing economy. India's Chief Economic Adviser V. Anantha Nageswaran has previously suggested excluding food to filter out supply-side shocks. However, the RBI has consistently defended the inclusion of food in CPI, highlighting its significance in household expenses and its ripple effects on other sectors of the economy.

Reassurance for Markets and Stakeholders

Market participants are likely to view the continuation of the 4% target as a sign of consistency, especially under the leadership of Governor Sanjay Malhotra, who assumed office in December. Recent surprises in interest rate decisions under his tenure have stirred debate over the clarity of the RBI’s policy direction. A reaffirmation of the inflation target could help alleviate such concerns and signal a steady hand at the helm.

Upcoming Decisions and Broader Implications

The committee is expected to finalize its recommendations by September, after which they will be submitted to the RBI leadership and subsequently discussed with the Ministry of Finance. The final decision on the inflation targeting framework, which is reviewed every five years, will apply from March 2026 onward.

Although a revision of the CPI basket is also being considered, insiders suggest any reduction in the weight of food items will be marginal. The RBI argues that food inflation can induce secondary price effects across the economy and, therefore, must remain within the scope of the central bank’s response tools.

Conclusion: Policy Anchored in Stability

India joined the league of inflation-targeting economies nearly a decade ago, emulating central banks like the Bank of England and the Reserve Bank of New Zealand. By recommending the continuation of the 4% target, the RBI’s internal panel reinforces the country’s commitment to a stable and transparent monetary policy regime. As the final decision looms, the broader message to stakeholders remains clear: India’s inflation framework is here to stay refined, but not redefined.