"Supply-side shocks limit the efficacy of inflation targeting in India." Critically examine this with reference to recent CPI trends.

Under the amended RBI Act, 1934, India follows Flexible Inflation Targeting (FIT). The target is 4% CPI inflation with a ±2% band, recently renewed till March 2031 [6]. Headline CPI rose from 4.83% in August 2026 [2] to 5.54% in September 2026 [1]. This rise shows that supply shocks strain FIT but do not make it ineffective.

How supply shocks limit FIT

• The repo rate cannot grow food: food led the September rise, with the Consumer Food Price Index (CFPI) at 7.74% [1] after a weak monsoon. A rate hike cannot add supply.
• Food inflation is persistent: RBI research finds food inflation shows core-like persistence and has been more volatile than core every year for a decade [3]. So "looking through" it is risky.
• Spillover pressure: RBI analysis warns that persistent food inflation keeps headline inflation away from the target and cannot be ignored when setting policy [4]. The MPC is then pushed to tighten against shocks it did not cause.
• Rural households hit harder: rural inflation (6.08%) was higher than the headline rate [1]. Tightening hurts growth but does little to protect the rural poor.
• Imported fuel: India's dependence on imported crude carries global energy shocks into transport costs, which the RBI cannot control.

Why the limitation is overstated

• Track record: average CPI inflation fell from 8.1% (2006-16) to 4.6% (2016-26) under FIT, and growth did not suffer [6].
• Flexibility is built in: the ±2% band absorbs short shocks. The target counts as missed only after three consecutive quarters outside the band. The RBI must then send a written report to the Government, which gives accountability without forcing panic rate hikes.
• Anchoring expectations: when the RBI's target is credible, a one-time shock is less likely to turn into a wage-price spiral.
• Headline target is a deliberate choice: RBI's 2025 review weighed core against headline inflation [5]. 47 of 48 inflation-targeting countries target headline inflation [5], and food is the largest part of poor households' spending.

Way forward

• MPC: hold rates, and tighten only if core inflation stays high.
• Government: release buffer stocks through the Open Market Sale Scheme (OMSS), ease imports of scarce items, and rationalise fuel taxes.
• Structural: build climate-resilient agriculture, cold chains and storage, and use the PDS to protect vulnerable households.

Supply shocks expose the limits of monetary tools, not a failure of FIT. The framework works best when fiscal and monetary policy work together: the Government manages supply and the RBI anchors expectations. That combination can deliver the price stability that SDG 2 (Zero Hunger) and the welfare goals of the Directive Principles require.