Ten years of inflation targeting: does the RBI's framework work in India?
If faster growth barely moves prices in India, can raising the repo rate tame inflation without hurting output?
Published 7 September 2026. Written by Pratidin from the reports linked at the end; every fact checked by a separate review before publishing. How we work
A decade after India adopted flexible inflation targeting (FIT), an analysis in The Hindu on 7 September 2026 asks whether the framework suits the Indian economy. Under Section 45ZA of the Reserve Bank of India Act, 1934, inserted in 2016, the Centre sets an inflation target in consultation with the RBI once every five years. The target has been 4% consumer price inflation, with a tolerance band of 2 percentage points on either side, since 2016, and it has been retained for 1 April 2026 to 31 March 2031. The RBI's six-member Monetary Policy Committee (MPC) sets the repo rate, the rate at which the RBI lends overnight to banks, to steer demand and expectations towards this target.
The article's central claim is that India's New Keynesian Phillips Curve (NKPC), which links inflation to economic activity and expected inflation, is almost flat. Using data from April 2012 to March 2026, with the Index of Industrial Production as the measure of output, it finds no significant trade-off between output and inflation. It attributes this to the lack of bargaining power among around 92% of Indian workers, so that faster growth does not translate into higher wages and prices. It also says that household inflation expectations, surveyed by the RBI, consistently exceed the RBI's own projections by a wide margin, of around 4 percentage points. With a flat curve and unanchored expectations, the article warns, raising rates could lower output without effectively controlling inflation, a risk of stagflation.
Defenders of the framework point to its record: average inflation of about 4.9% since FIT was adopted in 2016, against about 6.8% before it, and no return to the double-digit inflation of 2009 to 2013. The framework's accountability clause was first invoked in November 2022, when the RBI reported to the government after inflation stayed above 6% for three consecutive quarters. The debate also turns on food, which is driven by supply shocks that interest rates cannot fix. In the new Consumer Price Index series (base year 2024), released in February 2026, the weight of food and beverages fell to 36.75% from 45.86% in the 2012 series. Proposals under discussion include closer coordination of supply-side measures with monetary policy and better management of inflation expectations.
Prelims facts
- Section 45ZA of the RBI Act, 1934 empowers the Centre, in consultation with the RBI, to set the inflation target once every five years; it is 4% CPI inflation with a band of 2% to 6%, retained for April 2026 to March 2031.
- The Monetary Policy Committee has six members: three from the RBI including the Governor, who chairs it with a casting vote, and three external members appointed by the Centre for four years.
- The RBI is deemed to have failed if average inflation stays above the upper band or below the lower band for three consecutive quarters; it then reports to the Centre, as it did in November 2022.
- The Hindu analysis argues India's Phillips curve is almost flat because around 92% of workers lack bargaining power, weakening the link between output and inflation.
- In the CPI series with base year 2024, food and beverages carry a weight of 36.75%, down from 45.86% in the 2012 series.
Quick recall
- Which section of the RBI Act provides for the inflation target?
- Section 45ZA.
- India's inflation target and band?
- 4% CPI inflation, with a band of 2% to 6%.
- Period for which the 4% target was retained in 2026?
- 1 April 2026 to 31 March 2031.
- When is the RBI deemed to have failed the target?
- When average inflation stays above 6% or below 2% for three consecutive quarters.
- Which committee recommended inflation targeting for India?
- The Urjit Patel Committee (2014).
- Who has the casting vote in the MPC?
- The RBI Governor, who chairs it.
- Base year of India's new CPI series released in February 2026?
- 2024.
- What does a flat Phillips curve imply?
- Changes in output have little effect on inflation, so disinflation costs more output.
Prelims practice question
With reference to the Monetary Policy Committee (MPC) of the Reserve Bank of India, which of the following statements is correct?
- It has six members, of whom three are external members appointed by the Central Government
- It is chaired by the Union Finance Minister
- Its external members are appointed for one year and can be reappointed
- It sets the inflation target once every five years
Show answer
Answer: (a) It has six members, of whom three are external members appointed by the Central Government. The MPC has six members: the Governor (chair, with a casting vote), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the Centre for four years without reappointment. The inflation target is set by the Central Government in consultation with the RBI under Section 45ZA, not by the MPC.
Use this in UPSC Mains: previous-year questions
Recurring theme: Monetary policy and inflation control: the RBI's framework, its tools and its limits.
- How to use this
Use the decade review to argue that food inflation is largely supply-driven, so repo rate changes have limited power over it, while FIT has still lowered average inflation.
- Food inflation is driven by supply shocks such as food, fuel and monsoon disruptions, which interest rates cannot fix; tightening then costs output, and the Hindu analysis warns of stagflation risk.
- The Hindu analysis finds India's Phillips curve almost flat (April 2012 to March 2026 data) and household inflation expectations about 4 percentage points above RBI projections.
- Defenders note average inflation of about 4.9% since 2016 against 6.8% before FIT; the new CPI (base 2024) cuts food and beverages' weight to 36.75% from 45.86%.
The MPC's composition and role (six members, chaired by the Governor, deciding the repo rate) is the static base for this story.
Under the RBI Act as amended in 2016, price stability is the primary objective of monetary policy, and Section 45ZA provides for the inflation target; this story examines how well it has delivered.
Mains practice question
A decade of flexible inflation targeting has lowered average inflation in India, yet a flat Phillips curve and unanchored household expectations question its effectiveness. Critically examine. (250 words)
Model answer
India adopted flexible inflation targeting (FIT) in 2016 through amendments to the RBI Act, 1934, with a target of 4% CPI inflation and a band of 2% to 6%, since retained until March 2031. A decade on, its fit with Indian conditions is being questioned.
Achievements
- Average inflation of about 4.9% since 2016, against about 6.8% before FIT.
- A rule-based, transparent framework: a six-member Monetary Policy Committee (MPC), published minutes and a failure clause (Section 45ZN), first invoked in November 2022.
- No return to the double-digit inflation of 2009 to 2013; more predictable policy.
Concerns
- Flat Phillips curve: a Hindu analysis using April 2012 to March 2026 data finds little link between output and inflation, as around 92% of workers lack bargaining power.
- Unanchored expectations: household expectations in the RBI's own survey stay about 4 percentage points above its projections.
- Supply-driven inflation: food, fuel and monsoon shocks do not respond to rate changes; tightening then costs output, risking stagflation.
- Weak transmission to informal borrowers who rely on non-bank lenders.
Way forward
- Coordinate supply-side action (buffer stocks, trade policy, storage) with monetary policy.
- Review whether to focus on core inflation, while keeping headline CPI as the target.
- Improve communication to anchor household expectations.
- Use the new CPI (base 2024), with a lower food weight of 36.75%, to sharpen analysis.
FIT has delivered price stability, but it works best when paired with supply-side policy suited to an informal, food-sensitive economy.
The basics
Why this matters
Since 2016 India has fought inflation with a simple rule: the RBI must keep consumer price inflation at 4%, give or take 2 percentage points. A decade on, economists are asking whether the rule suits an economy where most workers are informal and food prices swing with the monsoon. To follow the debate you need four ideas: the Monetary Policy Committee, the Phillips curve, the Consumer Price Index and Inflation expectations.
How the framework was built
The Urjit Patel Committee recommended inflation targeting in 2014. The government and the RBI signed a Monetary Policy Framework Agreement in 2015. The Finance Act, 2016 amended the RBI Act to make the framework law: the Centre sets the target every five years, a Monetary Policy Committee sets the repo rate, and if inflation stays outside the band for three consecutive quarters, the RBI must explain to the government why, and what it will do.
- 2014Urjit Patel Committee recommends inflation targeting
- 2015Monetary Policy Framework Agreement between the Centre and the RBI
- 2016RBI Act amended; 4% target notified; MPC constituted
- 2021Target retained for 2021 to 2026
- 2022First failure report after three quarters above 6%
- 2026New CPI series (base 2024); target retained till March 2031
How a rate change is supposed to work
The RBI does not control prices directly; it changes the cost of money.
- 1Repo rate changesThe MPC raises or cuts the rate at which the RBI lends overnight to banks
- 2Lending rates moveBanks pass the change on to loans and deposits
- 3Demand respondsCostlier credit slows spending and investment
- 4Expectations settleCredible policy anchors what people expect inflation to be
Where the chain may break
The Hindu analysis argues that two links are weak in India. First, the Phillips curve is almost flat: with around 92% of workers lacking bargaining power, slower growth does not do much to wages and prices. Second, households expect inflation to be about 4 percentage points higher than the RBI projects, so Inflation expectations are not anchored. If both are true, raising rates costs output without buying much disinflation. Food prices, which move with the weather, add a third problem; the new Consumer Price Index gives food less weight.
The balance sheet
Supporters note that average inflation fell to about 4.9% after FIT was adopted in 2016, from about 6.8% before it. The open question, raised by the Hindu analysis, is whether the framework can work in India without supply-side policy doing part of the job.
Go deeper
In one line: A Hindu analysis argues that India's inflation targeting works poorly because output barely moves prices and household expectations are unanchored, while defenders point to lower average inflation since 2016.
Why it matters for UPSC
Monetary policy, the MPC and inflation are core GS3 and Prelims topics. UPSC has asked about the MPC's composition (2017) and the RBI's ability to control food inflation (Mains 2024). A decade review is a natural Mains question.
The core idea
The RBI's Monetary Policy Committee moves the repo rate to hit a 4% target for the Consumer Price Index. The theory relies on the Phillips curve, which says cooling demand cools prices, and on anchored Inflation expectations. The article says both are weak in India.
Numbers and dates to remember
- 4% target, band 2% to 6%, retained for 1 April 2026 to 31 March 2031.
- Section 45ZA: target; Section 45ZB: MPC; Section 45ZN: failure report.
- 6 MPC members; external members serve 4 years.
- 92%: share of workers the article says lack bargaining power.
- About 4.9% average inflation since 2016, against about 6.8% before FIT.
- 36.75%: food and beverages weight in the 2024-base CPI (45.86% earlier).
Where to go next
- Monetary Policy Committee: who sets the repo rate and how.
- Phillips curve: the link between output and inflation.
- Consumer Price Index: the measure the target uses.
- Inflation expectations: why beliefs about prices matter.
Go deeper: is India's inflation a monetary problem?
The case against the current design. The Hindu analysis finds a flat Phillips curve in data from April 2012 to March 2026, and it traces this to the informality of the labour market. If output hardly affects prices, rate hikes mainly reduce output. Add unanchored Inflation expectations, and the article sees a risk of stagflation: low growth with persistent inflation. Critics also note that food and fuel shocks drive much of India's inflation, and that rate changes reach informal borrowers weakly.
The case for the framework. Average inflation has been lower since 2016 and the double-digit inflation of 2009 to 2013 has not returned. The framework gave the RBI a clear goal, and the Monetary Policy Committee made decisions collective, voted and published. The failure clause worked as designed in 2022, when the RBI explained to the government why inflation had stayed above 6% for three quarters. Supporters argue that a clear target is itself what anchors expectations over time.
The design questions. Should the target be headline or core inflation, which excludes food and fuel? Headline CPI is what households feel, which is why the Urjit Patel Committee chose it. A lower food weight in the new Consumer Price Index may reduce the pull of food shocks on the headline number. The government's decision to retain the 4% target till 2031 settles the number for now, but not the debate on how monetary and supply-side policy should share the work.
Monetary Policy Committee
The six-member body that sets the repo rate to meet the inflation target.
In one line: The Monetary Policy Committee (MPC) is a statutory body under Section 45ZB of the RBI Act, 1934 that decides the policy repo rate needed to achieve the inflation target.
Composition
Six members: the RBI Governor (chairperson), the Deputy Governor in charge of monetary policy, one RBI officer nominated by the Central Board, and three external members appointed by the Central Government for four years, who cannot be reappointed. The quorum is four. Each member has one vote and the Governor has a casting vote in a tie.
How it works
The MPC meets at least four times a year, in practice six. Its resolution and the minutes of each meeting are published. The MPC was first constituted in September 2016.
Why it is in the news
The decade review of inflation targeting asks whether the MPC's main tool, the repo rate, can control inflation in India's economy.
Where to go next
Monetary Policy Committee: every story that connects to it (4)
Phillips curve
The economic relationship the article says is almost flat in India.
In one line: The Phillips curve describes a trade-off: when the economy runs hot and unemployment is low, inflation tends to rise, and when it cools, inflation eases.
From Phillips to New Keynesian
The economist A.W. Phillips found in 1958 an inverse relationship between unemployment and wage growth in Britain. The New Keynesian Phillips Curve (NKPC) adds expectations: current inflation depends on expected future inflation and on how far output is above its potential.
Why a flat curve matters
If the curve is steep, a small cut in demand brings down inflation. If it is flat, the central bank must sacrifice a lot of output for a small fall in inflation. The Hindu analysis finds India's curve almost flat and blames the weak bargaining power of about 92% of workers, which keeps wages from responding to demand.
Where to go next
Consumer Price Index
The price index the 4% target is set on, recently rebased to 2024.
In one line: The Consumer Price Index (CPI) measures changes in the prices of a basket of goods and services bought by households; India's inflation target uses the combined (rural and urban) CPI.
Who compiles it
The National Statistics Office under the Ministry of Statistics and Programme Implementation. In February 2026 it released a new series with base year 2024, replacing the 2012 base. The basket grew from 299 to 358 items, and the weight of food and beverages fell from 45.86% to 36.75%.
Headline and core
Headline inflation covers the whole basket. Core inflation strips out volatile food and fuel. India targets headline CPI, because it reflects what households pay, but core is watched as a guide to demand pressure.
Why it is in the news
The decade review says food, a supply-driven component, limits what interest rates can do.
Where to go next
Inflation expectations
Why what people believe about future prices can make inflation stick.
In one line: Inflation expectations are what households and firms believe future inflation will be; they feed into wages, prices and savings decisions, and so into actual inflation.
Anchored and unanchored
Expectations are 'anchored' when people trust the central bank to hit its target and do not change their beliefs after every price shock. When they are unanchored, a food price spike can raise expected inflation and set off a wider rise.
How India measures them
The RBI runs an Inflation Expectations Survey of Households in major cities. The Hindu analysis says household expectations in this survey have consistently exceeded the RBI's projections by around 4 percentage points, a sign that expectations are not anchored.
Where to go next
Take the 7 September 2026 quiz: 30 Prelims-style questions with answers