Food inflation in India is largely supply-driven, yet monetary policy remains the primary anti-inflation tool. Critically examine the efficacy of flexible inflation targeting in this context.

Flexible Inflation Targeting (FIT) comes from Section 45ZA of the RBI Act, 1934. It requires the RBI to keep headline CPI inflation at 4% ±2%, and this target has been renewed till March 2031 [4]. Food prices are now being driven by a weak monsoon and costly crude oil. This tests FIT, because the repo rate acts on demand while these shocks hit supply.

Limits of FIT against supply-driven food inflation

• Blunt tool: a higher repo rate cannot grow more onions. In October 2026 the MPC raised the repo rate to 5.50%, yet its own statement blamed a deficient monsoon, El Niño and high energy prices [1].
• Cost to growth: dearer loans hurt borrowers and firms at a time when the oil shock is already squeezing output.
• Unequal burden: rural food inflation (6.13%) was higher than urban (5.64%) in August 2026 [2]. Interest rates do little to protect the poorest consumers.
• Climate risk: repeated El Niño shocks make target misses more likely, which can damage the RBI's credibility.

Why FIT still works

• Food dominates household budgets: food and fuel make up over half of the CPI basket. A target that left them out would ignore most of a poor family's spending [3].
• Stopping the spillover: if food prices stay high, wages, rents and business mark-ups rise too. Monetary policy aims at these second-round effects [1][3].
• Track record: average inflation fell from 6.8% (2012–16) to 4.9% after FIT began, and volatility fell from 2.3% to 1.5% [3].
• Core inflation is no easy fix: in India, core inflation is not always lower than headline, only less volatile [4]. Uganda is the only inflation-targeting country that targets core inflation [3].
• Built-in flexibility: the ±2% band and the rule that a failure counts only after three straight quarters above the band let the RBI look past short-lived shocks.

The repo rate needs supply-side partners

• Buffer stocks: the Price Stabilisation Fund has existed since 2014-15. Its buffer onions are released from September to December [5]. Buffer sizes should follow a fixed rule, backed by more cold storage.
• Coordination with the government: adjusting fuel taxes, using trade policy, and value-chain schemes such as Operation Greens.

In short, FIT works well to anchor inflation expectations, but it cannot cure supply shocks. India should keep the headline target and pair it with climate-resilient farming, better storage and diverse energy imports. This division of labour would protect FIT's credibility and advance SDG 2 (Zero Hunger) for rural households.