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The RBI’s inflation targeting framework (ITF) completes a decade this year. It is not just a major milestone in India’s monetary policy but also in India’s macroeconomic framework. The ITF has been successful in lowering inflation in India in its first 10 years, but big challenges remain going forward, writes Amol Agrawal
What is ITF? How did it start?
In the 1970s, inflation increased in most economies due to rise in oil prices and failure of monetary policy. Economist Milton Friedman proposed monetarism to tackle inflation, but that did not work. The inflation targeting framework (ITF) emerged from the shadows of monetarism.
In the late 1980s, the government of New Zealand gave its central bank an inflation target to achieve. The combination of a transparent inflation target backed by autonomy and accountability became the ITF. The ITF achieved a miracle in not only lowering inflation to the desired target but also helped it remain around the target for a long period of time. As of 2026, nearly 50 countries have adopted the ITF.
When did ITF discussions start in India?
IN 1985, The Sukhamoy Chakravarty Committee endorsed monetarism to achieve inflation target of 4%. In 1997, the Committee on Capital Account Convertibility under SS Tarapore suggested adoption of the ITF as one of the pre-conditions to achieve capital account convertibility.
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In the early years of the 21th century, four expert committees — Fuller Capital Account Convertibility (Tarapore 2006), Mumbai as International Financial Centre (Percy Mistry 2007), Financial Sector Reforms (Raghuram Rajan 2008) and Financial Sector Legislative Reforms Commission (B. N. Srikrishna 2013) all suggested the ITF.
Why was it not accepted initially?
First, the Reserve Bank of India (RBI) did not wish to straightjacket its policy by focusing only on inflation and instead adopted a multiple-indicator approach where it tracked indicators such as growth, credit, money supply, etc. Second, India did not have a national measure of Consumer Price Index (CPI) which was the preferred inflation measure for ITF.
There were three CPI indices — Industrial Workers, Agricultural Labour and Rural Labour — but they were used for adjusting wages for the three occupational groups. The RBI used Wholesale Price Index (WPI) for its monetary policy which did not measure inflation at consumer level.
What finally led to its implementation?
First, from 2011 onwards, the government started releasing CPI inflation data at all-India level. Second, after the global financial crisis, the sharp rise in inflation led to questions about the RBI’s priorities to stabilise inflation over the multiple indicators. In 2013, the RBI constituted a committee under then Deputy Governor Urjit Patel whose recommendation on the ITF was finally implemented.
The government played a central role in adoption of the ITF by amending the RBI Act in May 2016. A Monetary Policy Committee (MPC) was tasked to achieve CPI inflation target of 4% with a band of +/- 2%. The band was adopted to help the RBI deal with supply shocks which constantly impact and change food and fuel prices, leading to sudden changes in inflation.
The minutes of the MPC were to be released 14 days after the meeting. In case the target is not met for three consecutive quarters, the Governor has to write to the government citing reasons for the deviation. The RBI also adopted a flexible ITF which aimed to “maintain price stability while keeping in mind the objective of growth.” The ITF became operational from October 2016 and was to be renewed every five years.
Has ITF been able to deliver?
The average CPI inflation has declined by 3.5 percentage points from 8.1% in the pre-inflation targeting (IT) decade (2006-16) to 4.6% in the IT period (2016-26). The average GDP growth has edged up marginally from 6.8% in the pre-IT decade to 7% in the IT decade. Thus, the ITF has achieved both price stability and higher growth. Not surprisingly, the ITF has been renewed twice in 2021 and 2026.
What are the reforms that MPC needs?
The MPC votes only on the repo rate; other monetary instruments such as Cash Reserve Ratio, Open Market Operations, etc., remain outside the scope of the MPC. This implies that the MPC does not have full control on deciding the monetary policy. The RBI Act should be amended to ensure that all the monetary instruments are brought within the purview of the committee.
What are the immediate challenges?
The global economy is re-entering a phase of supply shocks which is likely to keep prices of food, fuel and precious metals elevated for a long time. The weight of these commodities is close to 50% in India’s CPI basket, implying that supply shocks will test inflation levels.
The monetary policy is designed to manage demand shocks and not supply shocks. The RBI has faced this dilemma of managing monetary policy amidst supply shocks for long due to domestic factors; it now faces it due to global factors. The debate on whether the RBI should target headline (inflation of all items) or core inflation (inflation excluding food and fuel) is set to intensify.
What is the medium- to long-term challenge facing ITF?
Even though measured inflation has come closer to the target, most people continue to feel the pinch of inflation. This is also seen in RBI’s Household Inflation Expectations Survey which reveals people’s expectations of inflation to be around 9-10%.
The writer is associate professor, National Institute of Securities Markets
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.”
TOPICSECONOMYThis article was first uploaded on August thirty-one, twenty twenty-six, at twenty-eight minutes past seven in the evening. © The Indian Express (P) Ltd