Discuss the adequacy of CPI as the nominal anchor under India's Flexible Inflation Targeting framework. Should food inflation be excluded?

Q. Discuss the adequacy of CPI as the nominal anchor under India's Flexible Inflation Targeting framework. Should food inflation be excluded? (15 marks, 250 words)

Under Section 45ZA of the RBI Act, 1934, the Centre notifies a 4% CPI (Combined) target with a 2–6% band as the statutory anchor for Flexible Inflation Targeting (FIT) [1]. With April 2026 headline CPI at 3.48% yet food (CFPI) at 4.20%, the choice of anchor is again in focus [2].

Why CPI works as an anchor - Welfare-relevant: captures the actual consumption basket of households, unlike WPI. - Statutorily entrenched and publicly credible, aiding expectations anchoring [1]. - Newly rebased to 2024=100 using HCES 2023–24, adding OTT, e-commerce and modern services—fixing under-representation of the digital economy [3].

Limitations - Heavy food weight injects supply-shock volatility into a demand-management tool. - Wide rural–urban divergence (3.74% vs 3.16%) strains a single national target [2].

Should food inflation be excluded? - For: food is supply-driven (monsoon, mandi shocks); rate hikes cannot cool onion or tomato prices, and targeting it risks over-tightening. - Against: food is a majority share of the poor's basket; excluding it ignores lived cost-of-living and un-anchors expectations, since food shocks become generalised if persistent.

Rather than exclusion, the RBI's 2025 framework review favours retaining headline CPI while monitoring core inflation for the policy stance [1]. Headline anchoring preserves credibility and equity; core-inflation vigilance filters transient food noise. This calibrated approach—headline as target, core as signal—keeps FIT both welfare-sensitive and operationally sound, consistent with the framework retained till 2031 [1].

(~250 words)

Sources: 1. Discussion Paper on Review of Monetary Policy Framework, RBI (Aug 2025) — Section 45ZA statutory basis, 4% target with 2–6% band, headline-vs-core stance, framework retained to 2031 2. CPI Press Release on Base 2024=100 for April 2026, MoSPI/NSO — April 2026 headline 3.48%, CFPI 4.20%, rural 3.74% vs urban 3.16% 3. FAQs on CPI 2024 Series, MoSPI — rebasing to 2024=100, HCES 2023–24 weights, inclusion of modern/digital services