Is the flexible inflation targeting framework adequate to deal with supply-side shocks such as oil-price spikes from geopolitical conflicts? Critically examine.

Under Section 45ZA of the amended RBI Act, the Centre sets India's inflation target in consultation with the RBI. The target is 4% CPI inflation, with a ±2% band [1]. In October 2026 the Monetary Policy Committee (MPC) raised the repo rate to 5.5% as the West Asia conflict pushed up crude prices [2]. That decision tests the framework. Flexible inflation targeting (FIT) can handle supply shocks reasonably well, but only with fiscal support.

Strengths of the framework

• Room to look through shocks: The 2–6% band means the target is missed only if average inflation stays outside it for three consecutive quarters. This lets the RBI ignore a brief, first-round oil shock [3].
• Acts on second-round effects: Core inflation rose from 3.9% to 4.2%. The share of CPI items with inflation above 4% rose from 20% to 37% (March–August 2026). The MPC was reacting to inflation spreading, not to oil itself [2].
• Anchors expectations: Households' expectations of inflation track headline inflation closely (correlation 0.73) [4].
• Protects the poor: Food inflation reached 7.5% in FY24 [5]. A headline target keeps the prices people actually pay at the centre of policy. The framework was renewed to March 2031 [6].

Limitations

• Wrong tool for the cause: The repo rate cannot lower crude prices. Food and fuel prices "do not react to monetary policy" [3].
• Cost to growth: External member Ram Singh warned that the hike could "neutralise" growth-supportive policies. This raises the risk of stagflation (high inflation with slow growth) [2].
• Misleading core number: Core inflation was 4.2%, but only 2.9% without precious metals [2]. Gold prices rising because of the conflict make demand pressure look stronger than it is.
• Forward-guidance risk: Two members dissented on the shift to "calibrated tightening". They feared it would signal a long cycle of rate hikes [2].

Way forward

• Fiscal–monetary coordination: Cutting fuel taxes would absorb part of the shock [7].
• Clearer signals: Publish core inflation without gold, and tie the stance to clear conditions such as the diffusion share falling back.

FIT is broadly adequate: its flexible band and focus on second-round effects let it respond to oil shocks without overreacting. It cannot do the job alone. With fiscal support and clearer communication, the renewed framework can hold the price stability that Section 45ZA aims for while still supporting growth.