Pratidin
EconomyData setsRBI Act, amended 2016

Inflation target

4% CPI inflation, with a band of 2-6%.

Written by Pratidin; every fact checked by a separate review before publishing. How we work

Reviewed every five years.

Practise this in the app: flashcards, quiz and a timed answer
Prelims

Quick recall

What is India's inflation target?
4% CPI, within 2% to 6%.
Which section of the RBI Act sets it?
Section 45ZA.
Who sets the target?
The Central Government in consultation with the RBI.
How long is each target period?
Five years.
What counts as failure?
Inflation outside the band for three consecutive quarters.
Which index is used?
CPI (combined).

Asked before in UPSC

Recurring theme: Inflation management and the RBI's monetary policy framework

Mains
  1. 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.

    The 4% CPI target with a 2 to 6% band, and food's large weight in CPI, are central to judging monetary policy's reach.

  2. 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.

    The inflation target and the MPC framework describe how inflation is managed in India.

  3. 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.

    Low inflation after the 2016 flexible inflation targeting framework is part of the evidence to weigh here.

Prelims
  1. 2022 · Prelims

    In India, which one of the following is responsible for maintaining price stability by controlling inflation? (a) Department of Consumer Affairs (b) Expenditure Management Commission (c) Financial Stability and Development Council (d) Reserve Bank of India

    Tests the RBI's statutory price stability mandate under the inflation targeting framework.

  2. 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 RBI and is reconstituted every year. 3. It functions under the Chairmanship of the Union Finance Minister. (a) 1 only (b) 1 and 2 only (c) 3 only (d) 2 and 3 only

    Tests the MPC created by the 2016 amendment to the RBI Act: a six-member body chaired by the RBI Governor.

The basics

Why it matters

India's inflation target is 4% CPI inflation with a tolerance band of 2% to 6%. It is set by the government in consultation with the RBI, under the RBI Act as amended in 2016.

4% ± 2%
India's CPI inflation target
Set for five-year periods.

How the target works

The framework has clear accountability.

Inflation targeting
  1. 1Target setGovernment, in consultation with the RBI, under Section 45ZA.
  2. 2MPC sets ratesSix members vote on the repo rate.
  3. 3FailureInflation outside 2-6% for three consecutive quarters.
  4. 4ReportRBI explains causes and remedies to the government.

You now know

  • Target: 4% CPI inflation, band 2% to 6%.
  • Set under Section 45ZA of the RBI Act, 1934 (amended 2016).
  • Target is set for five-year periods.
  • Failure: outside the band for three consecutive quarters.

Go deeper

In one line: The inflation target anchors the RBI's policy and public expectations.

Why it matters for UPSC

Monetary policy basics are tested often.

The core idea

A clear number makes the RBI accountable. See Consumer Price Index and the Monetary Policy Committee.

Where to go next

In one line: The target has worked, but food shocks test it.

Debate

Whether to target core inflation, given volatile food prices in the Consumer Price Index. See Monetary Policy Committee.

Where to go next

Consumer Price Index

The inflation measure used

In one line: CPI measures changes in retail prices of a basket of goods and services.

Publisher

National Statistics Office (MoSPI).

Food weight

Food has a large weight, making CPI volatile.

Where to go next

Consumer Price Index: every story that connects to it (2)

Monetary Policy Committee

Who sets the rate

In one line: The MPC is a six-member body that sets the repo rate.

Members

Three from the RBI, three external.

Meetings

At least four times a year.

Where to go next

Monetary Policy Committee: every story that connects to it (4)

Prelims-style quiz

  1. India's inflation target is set under:

    1. Section 7 of the RBI Act
    2. Banking Regulation Act
    3. Section 45ZA of the RBI Act
    4. FRBM Act
    Show answer

    Answer: (c) Section 45ZA of the RBI Act. Section 45ZA.

  2. Consider the following:
    1. The target is set by the RBI alone.
    2. The target period is five years.
    Which of the statements given above is/are correct?

    1. 1 only
    2. 2 only
    3. Both 1 and 2
    4. Neither 1 nor 2
    Show answer

    Answer: (b) 2 only. The government sets it in consultation with the RBI.

  3. The tolerance band around the target is:

    1. 2% to 6%
    2. 4% to 8%
    3. 1% to 5%
    4. 3% to 7%
    Show answer

    Answer: (a) 2% to 6%. 2% to 6%.

  4. Failure is defined as inflation outside the band for:

    1. Two quarters
    2. One year
    3. One quarter
    4. Three consecutive quarters
    Show answer

    Answer: (d) Three consecutive quarters. Three consecutive quarters.