Retail inflation target: India asks RBI to keep 4 per cent goal through March 2031

The Centre has told the Reserve Bank to keep retail inflation near 4 per cent. The goal includes a 2 per cent band on either side. This applies for five years, ending March 2031. A Department of Economic Affairs gazette notice dated March 25 set the period. It starts on April 1, 2026.

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The notice kept the same target range used in earlier periods. The lower tolerance stays at 2 per cent and the upper limit stays at 6 per cent. India began formal inflation targeting in 2016. The government also kept the same target in March 2021. This makes it the second time the target is retained.

RBI inflation target and the notified tolerance band

Under the system, the RBI Governor-led Monetary Policy Committee, or MPC, sets policy rates. The aim is to meet the inflation target set by the government. The six-member MPC first met in October 2016. It was then asked to hold annual inflation at 4 per cent. The band was set at 2 to 6 per cent until March 31, 2021.

Over about the last decade, inflation stayed within the band for nearly three-quarters of the time. Price swings were highest during the pandemic period. Latest figures showed retail inflation at 3.21 per cent in February. It was 2.74 per cent in the month before. The Consumer Price Index released earlier this month used a 2024 base year.

RBI inflation target review and the 2025 discussion paper

Before the next target period begins on April 1, 2026, the RBI reviewed the target format. The central bank cited changes in global and local conditions. It then issued a discussion paper in August 2025. The paper asked stakeholders for views on four policy questions. The focus stayed on how best to guide monetary policy.

The RBI paper asked whether headline inflation or core inflation should guide policy. It linked this to food inflation shifts and food weight in the CPI. It also asked if a 4 per cent target still fits India’s needs. Another question was about changing the tolerance band width. It also asked if the target level should be removed, keeping only a range.

The discussion paper said inflation outcomes under flexible inflation targeting were hump-shaped. It said the first three years and last three years matched the target. It said the middle three years moved towards the upper band. It linked this to the pandemic and the Russia-Ukraine conflict. It said those events lifted inflation trends worldwide.

The RBI paper said the framework has broadly worked well since 2016. It noted that inflation stayed low and steady until around end-2019. It said inflation averaged near 4 per cent in that phase. It added that policy frameworks need certainty and credibility. It said this mattered more during high uncertainty.

The paper said tested parts of the framework should continue. It also said flexibility already built into the system should be used. It linked this to better macroeconomic outcomes over time. Separately, it noted inflation targeting turned 35 this year. It said New Zealand first used it in 1990, and it later spread worldwide.

The paper compared inflation before and after flexible inflation targeting in India. It said the average since adoption was 4.9 per cent in the current series. It compared this with 6.8 per cent in the pre-FIT period. With the new notification, the government again kept the 4 per cent target. The tolerance limits also stayed unchanged for 2026-2031.

With inputs from PTI