Critically evaluate India's Flexible Inflation Targeting framework after a decade of operation. Should the target be based on headline or core inflation?

The RBI Act, 1934 was amended in 2016 to adopt Flexible Inflation Targeting (FIT). Under it, the Centre sets a CPI target of 4% (band 2–6%) in consultation with the RBI, and a statutory MPC sets the repo rate to meet it [1][2]. A decade on, FIT has largely delivered, but supply shocks expose its limits.

Achievements

• Lower inflation: average CPI inflation fell from 6.8% (2012–16) to 4.9% after FIT [2].
• Greater stability: volatility, measured by standard deviation, fell from 2.3% to 1.5% [2].
• Accountability: if inflation stays outside the band for three consecutive quarters, the RBI must report the causes and remedies to the Centre, as it did in 2022 [3].

Limitations

• Weaker band adherence: inflation stayed within 2–6% about three-fourths of the time in 2016–21 but only two-thirds in 2021–26, owing to COVID-19 and the Russia–Ukraine war [2].
• Blunt tool against supply shocks: food and fuel prices barely respond to rate changes [2]. In 2022, inflation stayed above 6% for nine straight months even as the repo rate rose from 4% to 5.9% [3].
• Asymmetric accountability: the RBI answers for misses, but the supply levers belong to the government. These include fuel excise, buffer-stock releases, stock limits and export curbs [4].

Headline vs core: retain headline

• Cost-of-living relevance: food and fuel make up over 50% of India's consumption basket. Excluding them would ignore what households actually feel [2].
• Spillover: persistent food inflation spreads into core prices through wages, rents and mark-ups [2].
• Global practice: almost all inflation targeters use headline inflation. Uganda is the lone core targeter [2].
• Valid part of the core argument: the MPC should not chase transient food spikes with rates. The tolerance band already lets it look through such spikes while acting on second-round effects and expectations.

FIT has made inflation lower and steadier, and that record justifies keeping it. The way forward is to retain the headline 4% target and avoid range targets (4–6% or 3–6%), which the RBI warns may undermine credibility and fiscal discipline [2][5]. Monetary policy should be paired with timely government supply-side action and climate-resilient agriculture. Such coordination makes price stability a shared responsibility and protects the purchasing power of the poorest households.