Inflation target can be cut if growth, stable prices persist: RBI deputy governor

India's inflation targeting framework was renewed in March 2026 for the period April 2026 to March 2031, retaining the 4% Consumer Price Index (CPI) target w...

What Happened

India's inflation targeting framework was renewed in March 2026 for the period April 2026 to March 2031, retaining the 4% Consumer Price Index (CPI) target with a tolerance band of ±2 percentage points (i.e., 2–6%).
An RBI Deputy Governor has indicated that India could consider lowering the headline inflation target and narrowing the tolerance band if robust GDP growth and more stable prices persist through the five-year review cycle.
The possibility is contingent on the global economic environment stabilising; ongoing geopolitical disruptions and supply-chain volatility were cited as reasons to retain the existing framework's flexibility for now.
No change to the current target has been proposed; the observation is a forward-looking policy signal, not a near-term action.

Static Topic Bridges

Flexible Inflation Targeting (FIT) Framework in India

India formally adopted the Flexible Inflation Targeting framework through the Finance Act, 2016, which amended the Reserve Bank of India Act, 1934 by inserting Chapter IIIF (Sections 45Z–45ZL). Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of CPI once every five years. The objective of maintaining price stability while keeping in mind the objective of growth was simultaneously written into the preamble of the RBI Act.

The current five-year target: CPI inflation at 4%, with an upper tolerance of 6% and lower tolerance of 2%, effective April 2026–March 2031.
A breach of the band for three consecutive quarters triggers a mandatory report from the RBI to the government explaining the reasons and remedial actions.
The Monetary Policy Committee (MPC), constituted under Section 45ZB, is the six-member body (three RBI officials + three government-appointed external members) that determines the policy repo rate to achieve the target.

Connection to this news: The five-year review cycle is the formal occasion when the target can be revised. The Deputy Governor's statement signals that a lower target or narrower band could be on the table for the 2031 review, provided macro conditions continue to improve.

Consumer Price Index (CPI) as the Nominal Anchor

India's shift to CPI-based targeting in 2016 replaced the earlier multiple-indicator approach. CPI captures the price experience of the average household, including food and fuel, which together account for roughly half of the CPI basket — making Indian inflation particularly sensitive to monsoon outcomes and global commodity prices.

CPI (Combined) is compiled by the Ministry of Statistics and Programme Implementation (MoSPI) using data from the Central Statistics Office.
The tolerance band of ±2 percentage points was designed to accommodate supply-side shocks (e.g., food price spikes, oil price surges) without requiring a monetary policy response every time the target is temporarily breached.
India's CPI averaged approximately 5.4% during FY2021–FY2024, declining toward 4% by early FY2026 as food and energy price pressures eased.

Connection to this news: Sustained CPI inflation nearer the 4% midpoint over multiple years would be the empirical basis for any argument to lower the target — demonstrating that a tighter anchor is achievable without sacrificing growth.

Monetary Policy Credibility and the Trade-off Argument

Central bank credibility literature (Sargent & Wallace, Kydland & Prescott) argues that a publicly announced, legally binding target anchors inflation expectations. Lowering a target that has been credibly achieved signals improved institutional capacity, but risks credibility if the economy then overshoots the new lower band.

Countries that have lowered inflation targets post-achievement include Chile (moved from 3% ± 1% to 3% with narrower band) and several advanced economies post-2008.
The argument against change: even a small target revision can temporarily unsettle bond and currency markets if not carefully communicated.
India's external environment — geopolitical supply shocks, dollar fluctuations — provides grounds for retaining the wider ±2% band as an automatic stabiliser.

Connection to this news: The Deputy Governor's cautious framing ("if growth and stability persist") reflects this credibility calculus — signalling ambition while avoiding a premature commitment.

Key Facts & Data

Current inflation target: CPI 4% (2–6% tolerance band), operative April 2026 – March 2031, renewed under Section 45ZA of the RBI Act.
Legal basis: Finance Act, 2016, amending RBI Act, 1934 (Chapter IIIF).
Monetary Policy Committee: 6 members — RBI Governor (chair), 2 RBI Deputy Governors, 3 external members appointed by the Central Government.
RBI Deputy Governor who made the statement: Poonam Gupta (also the RBI's Chief Economist before appointment as Deputy Governor).
India's GDP growth rate referenced: above 7.5% sustained without necessarily stoking inflation — cited as evidence the growth-inflation trade-off has improved.
Next formal review opportunity: March 2031, when the current five-year mandate expires.
The ±2% tolerance band successfully accommodated CPI breaching 6% during COVID-19 (FY2021) and the Russia-Ukraine commodity shock (FY2023) without abandoning the framework.