Within a single year, India moved from record-low inflation to a breach of the upper tolerance band. Analyse the causes and suggest coordinated fiscal and monetary responses.

Under flexible inflation targeting (FIT), the RBI aims to keep CPI inflation at 4% within a band of 2% to 6% [3]. Headline CPI hit an all-time low in October 2025, and the repo rate was cut to 5.25% [2]. By October 2026, CPI was 6.09% [1], just above the upper limit. The reversal had several causes, so it calls for a joint response.

Causes of the reversal

• Base effect: a very low 2025 base lifts year-on-year 2026 readings even without a big jump in prices.
• External shock: renewed West Asia conflict made crude oil prices volatile [4], which pushed up imported energy costs.
• Generalisation: the RBI saw early signs of inflation spreading to other prices, with CPI at 5.5% in September 2026 [4]. Strong growth (FY27 GDP projected at 7.1%) added demand pressure [4].
• Structural fragility: food makes up about 46% of the CPI basket [5], so supply shocks move the headline number sharply.
• Lagged easing: the rate cuts of 2025 [2] were still adding to demand in 2026.

Low base + crude shock + food weight → headline spike
        ↓ (if unchecked)
Wage/price expectations → generalised inflation

Fig: How a supply shock turns into lasting inflation

Coordinated responses

Monetary

• Anchor expectations: the MPC's 25 bps hike to 5.50% and its move to "calibrated tightening" [4] signal that the RBI means to defend the band.
• Use transmission: loans linked to an external benchmark (EBLR) have made repo changes reach lending rates faster [6], so a few measured hikes can work without sharp tightening.
• Clear forward guidance: markets were already pricing in a further hike [1], so a clearly explained December decision limits volatility.

Fiscal (supply side)

• Buffer stock releases, tax changes and export curbs help stabilise prices [5], for example by easing excise duty on fuel during the crude shock.
• Fiscal consolidation keeps the government's own spending from adding to demand that the RBI is trying to cool.
• Institutional coordination: regular contact between the RBI and the Finance Ministry can line up the timing of both sets of measures.

In short, the breach came from a low base, imported energy costs and a food-heavy CPI basket, all on top of the earlier easing. Monetary policy can anchor expectations, but only fiscal and supply-side action can ease the actual shortages. Acting together keeps the 4% target credible and protects poor households' real incomes, which supports price stability and inclusive growth (SDG 8).