Critically evaluate the effectiveness of the Flexible Inflation Targeting framework in India in addressing supply-side (food and fuel) versus demand-side inflation.

Flexible Inflation Targeting (FIT), statutorily anchored in the 2016 amendment to the RBI Act, 1934, mandates a 4% CPI target with a ±2% tolerance band [1]. Its record shows real strength against demand-driven price pressure, but structural limits where inflation originates in supply.

Where FIT has worked: demand-side inflation

• Credible nominal anchor: a legislated numerical target plus a six-member MPC has shifted policy from discretion to rule-bound, accountable decision-making [1].
• Effective transmission: the repo rate operates on credit demand and aggregate spending — precisely the channel demand-pull inflation travels through.
• Growth not sacrificed: in August 2026 the MPC held the repo rate at 5.25% with a neutral stance while raising the FY27 growth forecast to 6.7% and trimming its inflation projection to 5% — disinflation without a hard landing [2].
• Flexibility built in: the tolerance band lets the MPC "look through" transitory shocks instead of reflexively tightening.

Where FIT is weak: supply-side (food and fuel) inflation

• Structural mismatch: food and fuel exceed half the CPI basket, yet the RBI itself concedes such inflation is "volatile due to supply shocks" and "does not react to monetary policy" [3].
• Blunt instrument: June 2026 headline CPI of 4.38%, with food inflation at 5.32% [4], was driven by crude and food prices; a rate hike would have curbed output, not supply.
• Targeting dilemma: the RBI's framework review debates headline versus core targeting — excluding food ignores the household cost of living, including it imports noise into policy [3].
• Dependence on non-monetary tools: buffer stocks, duty rationalisation and forex management, not the repo rate, do the real work here.

FIT has thus succeeded as a credibility-building anchor for demand-side management while remaining structurally limited against supply shocks — a limitation of scope, not design. The way forward lies in retaining the headline target for welfare relevance, using the tolerance band judiciously, and pairing monetary prudence with fiscal and agricultural supply-side reform, so that price stability genuinely underpins sustained, inclusive growth.