Has flexible inflation targeting served India well? Evaluate it in light of the Keynesian–orthodox debate.

Since 2016, the amended RBI Act has required Flexible Inflation Targeting (FIT): a 4% CPI target with a ±2% band, pursued by a six-member Monetary Policy Committee (MPC) [1]. FIT reflects the orthodox view that a central bank should secure price stability by setting interest rates. Keynesians reply that demand shapes output and jobs. India's record shows that FIT has largely worked, but it has clear limits.

Orthodox case: where FIT delivered

• Lower inflation: average CPI inflation fell from 7.4% before FIT (2012–16) to 4.4% in FIT's first phase (2016–21) [1].
• Less volatility: the standard deviation of headline inflation fell from 2.3 to 1.6, and then to 1.2 [1].
• Anchored expectations: RBI finds that inflation expectations are better anchored under FIT [1]. This reduces the risk of wage-price spirals.
• Pro-poor stability: low, steady inflation protects households that have no way to shield their savings from rising prices.

Keynesian critique: where FIT fell short

• Supply shocks: in the second phase (2021–25), inflation averaged 5.4% and food inflation 6.0%. The MPC missed its target in 2022 and had to send a report to the government [1].
• Limits of the repo rate: RBI itself credits government supply-side steps and falling global commodity prices, alongside monetary policy, for the later fall in inflation [1]. A rate hike cannot grow more food. It mainly cuts demand.
• Food-heavy basket: food has a 45.9% weight in India's CPI, the highest among inflation-targeting countries [1]. Rate hikes therefore often fight supply-driven inflation.
• Unmeasured output costs: the Urjit Patel Committee (2014) planned a gradual glide path to limit the growth cost of disinflation. However, no sacrifice ratio (output lost per point of inflation removed) has been published [1].
• Distribution: the global labour income share fell from 53% (2014) to 52.4% (2024) [2]. Causes include technology and the pandemic, so FIT is not the only factor.
• Policy mix: in post-2008 Europe, spending cuts hurt growth more than forecast because fiscal multipliers were underestimated. Fiscal policy therefore matters, though the same study found little such evidence for emerging markets [3].

On balance, FIT has served India well by the orthodox test of credibility. The Keynesian critique exposes its blind spots on supply shocks and growth costs. RBI's 2025 framework review [1] should keep the 4% target, which RBI's trend-inflation estimates of 3.5–4.4% support [1]. It should also publish sacrifice-ratio estimates, pair FIT with supply-side food reforms, and preserve room for counter-cyclical fiscal policy. This mix of stability and growth matches Article 39(a)'s goal of an adequate livelihood and SDG 8.