Critically examine the Consumer Price Index (CPI)-based inflation targeting framework in India. How does the Monetary Policy Committee balance price stability with growth objectives?

India adopted flexible inflation targeting through the 2016 amendment to the RBI Act, 1934, under which the Centre, in consultation with the RBI, notifies a CPI-based target — currently 4% with a ±2% tolerance band — once every five years under Section 45ZA [1]. December 2025's headline reading of 1.33%, below the 2% lower bound, tests the framework's edges [2].

Merits of the CPI-based framework

• Anchored expectations: a statutory, publicly notified target replaced discretionary policy; the MPC must report to the Government if inflation stays outside 2–6% for three consecutive quarters [1].
• Consumer relevance: CPI (base 2012=100) captures retail prices actually faced by households, unlike WPI, and is compiled independently by MoSPI from over 1,100 urban markets and 1,180 villages, insulating the number from the rate-setter [2].
• Institutional credibility: a six-member MPC with external members made decisions collegial and transparent [1].

Limitations

• Food dominance: with food carrying the largest CPI weight, headline inflation swings on supply shocks and base effects — December 2025's food deflation of –1.85% suppressed the headline while core inflation touched a 28-month high of 4.8%, sending contradictory signals [2].
• Blunt instrument: the repo rate cannot address weather-driven or global commodity price shocks, which need supply-side action.
• Design debates persist, prompting the RBI's own Discussion Paper on Review of the Monetary Policy Framework (August 2025) [3].

Balancing price stability and growth The mandate itself is "flexible" — Section 45ZB requires the MPC to maintain price stability while keeping in mind the objective of growth [1]. The tolerance band, not a point target, permits temporary deviations; the MPC uses the stance (accommodative/neutral) and forward guidance to signal intent, and looks through transient food shocks to durable core trends [2][3].

The framework has delivered credibility without sacrificing growth, but its evolution must continue — refining the index, strengthening supply-side management, and pairing monetary discipline with fiscal coordination will keep price stability an instrument of inclusive growth rather than a constraint upon it.