The Centre has decided to keep the inflation target unchanged at 4%, with a tolerance band of two percentage points on either side, for the Monetary Policy Committee of the Reserve Bank of India for the next five years. A senior official confirmed this decision, noting that a formal notification is expected later this month.
Key aspects of the policy framework include continuing the 4% inflation target for the next five-year cycle ending March 2031, with the permissible range maintained between 2% and 6%. Evaluations of the system have shown that the target band effectively anchored inflation expectations between 2016 and 2026. Even during periods of disruption, including the pandemic and subsequent inflation volatility, the government chose to maintain the framework to preserve macroeconomic stability and policy credibility.
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In March 2021, the government reaffirmed the flexible inflation targeting (FIT) framework for the period FY22–FY26, continuing with the Consumer Price Index (CPI) as the benchmark for inflation. Introduced in 2016, the framework is designed to strike a balance between maintaining price stability and supporting economic expansion.
Decadal Success
Over time, this target has become an important anchor for India’s macroeconomic policy environment. Since adopting the inflation-targeting regime, monetary policy has gained greater credibility, supported by improved inflation outcomes. After the Monetary Policy Committee began functioning in September 2016, average CPI inflation fell to about 3.8% between October 2016 and February 2020 (before the onset of Covid)—significantly lower than the 7.3% average recorded from January 2012 to September 2016. The framework’s resilience was further demonstrated during the COVID-19 crisis, when policymakers managed sharp trade-offs between growth and inflation along with severe supply-side disruptions.
“Threshold inflation is an empirical as well as dynamic issue…it depends on various aspects -both macro and micro. For India, a number of studies have suggested it is close to 4%,” said N R Bhanumurthy, Director, Madras School of Economics. This has worked well for India in the last 10 years, he said. “The 2% band is to take care of both anticipated and unanticipated shocks to inflation…further FIT being a forward-looking framework, this flexibility is needed to absorb fiscal and trade shocks, which are frequent in nature,” he added.
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Inflationary pressures in India peaked in FY23, when retail inflation averaged roughly 6.7%, largely driven by high global commodity prices and food supply disruptions. In subsequent years, inflation gradually cooled as supply chains improved and commodity markets stabilized. From FY24 onward, the trend moved steadily downward. By FY26 (April-December), softer food prices and easing global commodity costs had significantly reduced inflationary pressures, helping overall price growth to less than 2%. Based on available data, the average CPI inflation for the period from FY22 to FY26 (April–December) is 4.8%.
New CPI Series
A firming of prices, coupled with a revision of the gauge, pushed retail inflation to 2.75% in January 2026, the highest print since August 2025, cementing the chances of an extended rate pause by the RBI. The January inflation, measured by the revised CPI with an updated base year of 2024, was largely on expected lines, though economists said the older series (2012 base) might have pegged inflation about 40 basis points lower. Headline retail inflation for February is estimated to have climbed further to 3.11, largely due to the food and beverages segment, according to an FE poll of economists. This would mean the key inflation figure might have stayed below the 4% target for the 13th consecutive month.
The new CPI series seeks to capture changing consumption patterns with revised weighting for components, notably food and housing. The weighting of food, the index’s most volatile component prone to supply shocks, has been slashed from 42.62% in the 2012 series to 36.75% in the new one,
On February 23, 2026, RBI Governor Sanjay Malhotra said that the introduction of a revised base year and methodological adjustments in the CPI would not automatically justify any change in the current inflation-targeting framework of 4% ± 2%. He noted that the central bank had already submitted its recommendations ahead of the upcoming policy review. While the updated series includes improvements in methodology, coverage, and representativeness—and may reduce volatility—the changes are not substantial enough to require a shift in policy, he had said. One notable modification in the revised CPI basket is the reduced weight assigned to food items.
TOPICSinflationRetail inflationThis article was first uploaded on March eleven, twenty twenty-six, at thirty-four minutes past seven in the evening.