Discuss the statutory framework of Flexible Inflation Targeting in India. How does RBI balance its price-stability mandate with exchange-rate management objectives?

Flexible Inflation Targeting (FIT) became India's statutory monetary policy regime after the RBI Act, 1934 was amended in 2016. Recent measures to attract dollar inflows show that price stability, though legally supreme, must be pursued alongside external-sector stability.

Statutory framework of FIT

• Legal basis: Chapter III-F, inserted into the RBI Act, 1934 (2016), converted an informal multiple-indicator approach into a statutory mandate [1].
• Section 45ZA: the Central Government, in consultation with RBI, fixes the CPI target once in five years — currently 4% with a 2–6% tolerance band, effective till 31 March 2031 [1].
• Section 45ZB: a six-member Monetary Policy Committee (3 RBI, 3 government-nominated) decides the repo rate, meeting at least four times a year [1].
• Accountability: if inflation stays outside the band for three consecutive quarters, RBI must report to government the reasons, remedial actions and timeline [1].
• Operating framework: repo rate as primary instrument, weighted average call rate as operating target, with SDF, MSF and reverse repo managing liquidity [1].
• Periodic review: RBI's Discussion Paper on Review of the Monetary Policy Framework (August 2025) preceded the latest quinquennial review [2].

Balancing price stability and exchange-rate management

• No exchange-rate target: India follows a managed float; RBI intervenes against volatility, not to defend a level.
• Separate toolkit: capital-flow instruments, not the repo rate, defend the rupee — FCNR(B) incentives and concessional forex swaps for PSU External Commercial Borrowings drew about $32 billion via FCNR(B) and over $7 billion into G-Secs after the June measures [3].
• Complementarity: depreciation imports inflation through fuel and edible-oil prices, so currency stability itself serves the price-stability mandate.
• Tensions: RBI absorbs hedging and swap costs (a quasi-fiscal burden), inflows add liquidity needing sterilisation, and NRI deposits are interest-sensitive and reversible.

FIT thus supplies a rules-based nominal anchor while leaving room for pragmatic external management. The framework works best when instruments stay distinct — repo rate for inflation, reserves and capital-flow measures for volatility. Deeper forex and bond markets, plus transparent communication, would strengthen both credibility and macroeconomic resilience.