Flexible inflation targeting
In one line: Under the RBI Act, the Centre sets a CPI inflation target (4%, with a band of 2% to 6%) and the RBI is accountable for meeting it.
What the law says
Section 45ZA of the RBI Act lets the Centre, in consultation with the RBI, fix the inflation target once every five years. The target is set in terms of the Consumer Price Index (combined). If average inflation stays above the upper band or below the lower band for three consecutive quarters, the RBI has failed and must report to the Centre the reasons and the remedial steps it will take.
Why 'flexible'
The RBI aims at 4% but also considers growth. The 2% to 6% band absorbs shocks. In October 2026 inflation was inside the band (4.82% in August), but the projected 6.0% for Q3 pushed the MPC to act early.
Where to go next
- Monetary Policy Committee
- Monetary policy transmission
Flexible inflation targeting in the news
- RBI raises repo rate to 5.5%, first hike since 2023, shifts to 'calibrated tightening' 8 October 2026
The legal target the MPC is trying to meet.
On the reference shelf
Previous-year questions on this
- 2024 · GS3 · 10 marks What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.
- 2022 · GS2 · 15 marks Besides the welfare schemes, India needs deft management of inflation and unemployment to serve the poor and the underprivileged sections of the society. Discuss.
- 2019 · GS3 · 10 marks Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments.
- 2020 · Prelims Consider the following statements: 1. The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI). 2. The WPI does not capture changes in the prices of…
- 2017 · Prelims Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of…