Centre Sets Target Of Maintaining Retail Inflation At 4% For 5 Years

The government on Wednesday set a target of maintaining retail inflation at 4 per cent with a margin of 2 per cent on either side for another five years ending March 2031.

To control the price rise, the government in 2016 gave a mandate to the RBI to keep the retail inflation at 4 per cent with a margin of 2 per cent on either side for five years ending March 31, 2021. Subsequently, in March 2021, the government maintained the same target. This is the second time the government has retained the inflation target.

The central government, in consultation with the Reserve Bank, hereby notifies the inflation target for the period beginning April 1, 2026, and ending on March 31, 2031, a gazette notification issued by the Department of Economic Affairs dated March 25 said.

According to the notification, the inflation target is 4 per cent with an upper tolerance level of 6 per cent and a lower tolerance level of 2 per cent.

India adopted the inflation-targeting framework and formally tasked the central bank with it in 2016.

In its first meeting in October 2016, the six-member MPC was given the mandate to maintain annual inflation at 4 per cent until March 31, 2021, with an upper tolerance of 6 per cent and a lower threshold of 2 per cent.

Over the past decade, inflation has stayed within the mandated band for roughly three-quarters of the time, with volatility peaking during the pandemic years.

According to the latest data, retail inflation in the country rose to 3.21 per cent in February from 2.74 per cent in the preceding month.

The Consumer Price Index (CPI) released earlier this month is based on the new series with a base year of 2024.

The RBI Governor-headed six-member Monetary Policy Committee (MPC) determines the policy rate required to achieve the inflation target.

Against the backdrop of the next review of the target to be effective from April 1, 2026, and the significant changes in the global and domestic economic environment, the RBI said it has undertaken a review of the nature and format of the inflation target.

Towards this, the RBI came out with a discussion paper in August 2025 seeking feedback from stakeholders on four questions: Whether headline inflation or core inflation would best guide the conduct of monetary policy, given evolving relative dynamics of food and core inflation and the continuing high weight of food in the CPI basket? Whether the 4 per cent inflation target continues to remain optimal for balancing growth with stability in a fast-growing, large emerging economy like India? Should the tolerance band around the target be revised in any way, including whether the tolerance band be narrowed, widened or fully done away with? And should the target inflation level be removed, and only a range be maintained within the overall ambit of maintaining flexibility without undermining credibility? The discussion paper said the inflation performance over the nine years of flexible inflation targeting (FIT) witnessed a hump-shaped performance, with the first three years and the last three years remaining aligned to the target.

The middle three years showed an inclination towards the upper tolerance band, confronted with a once-in-a-century pandemic, followed by the Russia-Ukraine conflict that drove up the inflation trend worldwide during this period.

"The experience of the FIT framework, introduced in 2016 and first reviewed in 2021, has broadly performed well. From the inception of FIT till about the end of 2019, inflation was low and stable, averaging around 4 per cent," it had said.

It further said that the conduct of monetary policy frameworks needs both policy certainty and credibility. This has become particularly important during the current environment of heightened uncertainty. It is, therefore, important that the basic tenets of the framework that have been tested and judged to be favourable are continued.

The adaptability and flexibility already inbuilt into the extant framework should be leveraged to nudge the economy towards further improved macroeconomic outcomes.

Inflation targeting (IT) turns 35 this year. With New Zealand being the first country to implement IT in 1990, it has become the most widely adopted monetary policy framework globally.

The paper said the inflation levels have seen a distinct decline with the average since the adoption of FIT at 4.9 per cent, vis-a-vis an average of 6.8 per cent over the pre-FIT period in the current series.