Monetary Policy Framework
Why it Matters?
The Reserve Bank of India (RBI) released a discussion paper on the monetary policy framework. The paper invited feedback on four issues: targeting headline vs core inflation, revising the 4% inflation target, changing the 2–6% tolerance band, and adopting a range-only approach.
What You Should Know?
The current inflation target is 4% CPI with a 2–6% band, valid until March 2026.
RBI warned that raising the inflation target could be seen as weakening policy credibility and eroding gains from fiscal discipline and price stability.
Most countries target headline CPI inflation; only Uganda targets core inflation.
Headline Inflation
Measures the total inflation in an economy, including all components such as food, fuel, housing, and other goods and services.
Reflects the overall cost of living; more volatile.
Core Inflation
Excludes volatile items like food and fuel; focuses on underlying price trends.
Provides a clearer picture of long-term inflation trends
RBI targets headline CPI inflation, including food and fuel, rather than core inflation.
Monetary Policy Framework
The framework was agreed upon between RBI and the Government of India in 2015.
It is reviewed every five years; the current target is valid until March 2026.
RBI’s primary objective under this framework is to maintain price stability while supporting growth.
The framework allows the RBI to use monetary policy tools like repo rate, reverse repo rate, and open market operations to manage inflation.
India follows a flexible inflation targeting (FIT) framework for monetary policy.
Under FIT, the RBI aims for 4% CPI inflation, with a tolerance range of 2–6%.
The FIT framework was formally adopted in 2016 in consultation with the Government of India.