Given the predominance of supply-side and food-price shocks in Indian inflation, is a single numerical inflation target an adequate monetary policy anchor? Discuss.

Under Section 45ZA of the RBI Act, 1934, the Centre notifies a single CPI target of 4% with a 2–6% band [4]. Since food and fuel form over half the consumption basket and move with supply shocks [2], the adequacy of this anchor is genuinely contested — though the answer lies in supplementing, not discarding, it.

Why the single numerical anchor remains defensible

• Credibility: a statutory target with a six-member MPC, minuted votes and a defined failure trigger (breach for three consecutive quarters) replaced the earlier discretion-based multiple-indicator approach [4][1].
• Legitimacy of headline CPI: the RBI holds that excluding food and fuel — more than 50% of the basket — would anchor an index divorced from what households actually experience [2][5].
• Second-round effects: persistent food inflation transmits into core inflation through wages, rents and mark-ups, so it cannot be treated as monetary policy's blind spot [2].
• Built-in flexibility: the ±2% band lets transient shocks pass through, and headline inflation has returned decisively within the band in recent readings [3].

Where it falls short

• Instrument mismatch: the repo rate works by compressing demand [4], whereas monsoon failure, crude and edible-oil price spikes are supply-side and largely unresponsive to rate action [5].
• Real-economy cost: critics argue India's Phillips curve is relatively flat, so tightening sacrifices output and employment without proportionate disinflation.
• Weak transmission: segmented credit markets dilute pass-through of policy rates to lending rates.
• Distributional burden: food-price shocks hit low-income households hardest, and interest rates cannot cushion them.

A numerical target is thus a necessary but insufficient anchor — indispensable for expectations, inadequate alone against supply shocks. Its retention at 4% for 2026–31 should be paired with buffer-stock management, calibrated trade policy, agri-logistics investment and stronger transmission, so that price stability is achieved with, rather than at the cost of, inclusive growth.