RBI signals potential shift to lower inflation target and narrower band if macro stability holds

Mumbai: A decade into India’s inflation-targeting regime, the Reserve Bank of India (RBI) has opened the door, albeit cautiously, to a possible recalibration of its inflation target and a tighter tolerance band in the next review cycle.

“If the growth-inflation mix evolves as it has in the past 10 years—robust growth, and lower and more stable inflation—one could perhaps consider tweaking the level of inflation and the tolerance band a bit,” deputy governor Poonam Gupta said in a speech on Tuesday, adding that this could justify a slightly lower inflation target and a slightly narrower tolerance band.

However, she struck a note of caution, saying that if the global environment remained as challenging as it has been over the past six years, it would warrant the predictability and flexibility provided by the current framework.

Gupta added that the RBI could further refine its approach, particularly around how it measures and monitors core inflation. “More, better, and timely communication has been a work in progress and will continue to remain so,” she said.

Nevertheless, she noted that the existing regime has the necessary levers to further improve the country's economic stability and growth outcomes. “Calibrated refinements, backed by structural changes, if any, can continue to retain the relevance and appropriateness of the framework in the years ahead.”

These remarks follow the government’s decision on 25 March to retain the 4% inflation target (with a +/- 2% tolerance band) for another five years, extending the current mandate through March 2031.

“Price stability and growth have thus proved complementary rather than conflicting objectives under the Indian framework,” Gupta said, addressing a long-standing criticism of inflation targeting. 

The RBI’s review, based on public consultation and global evidence, strongly favoured retaining the current framework architecture. Over 90% of respondents backed headline inflation as the target, while a similar proportion supported retaining the 4% target itself. 

On the tolerance band, about two-thirds of respondents preferred keeping the existing +/- 2% range, citing its role in absorbing shocks such as the covid pandemic and the Russia-Ukraine war without undermining policy credibility. 

Globally, inflation-targeting regimes have proved durable, with no country abandoning the framework once adopted. Instead, central banks have periodically fine-tuned targets and bands in response to evolving macroeconomic conditions.

Against this backdrop, the RBI emphasized that continuing with the current framework should not be mistaken for resistance to change. “The framework’s durability over the past decade reflects a willingness to learn from experiences,” Gupta said.