The central government favours sticking to the current inflation targeting framework from FY27 onwards, amid talk of whether monetary policy should target non-food inflation, sources told Moneycontrol.
Adopted in 2016, the current flexible inflation targeting framework tasks RBI with keeping retail inflation measured by Consumer Price Index at 4 percent in the medium term with a band of 200 basis points, or 2 percentage points, on either side.
The current targeting framework is under review and valid until March 2026.
Termed flexible inflation targeting (FIT) framework, it was initially set for a five-year period (2016-21) and was renewed by the government for another five years (2021-26).
"The inflation targeting framework is valid till March next year. There is a thinking that there is no need for a review, because we are well within the band,” one of the sources said.
The Economic Survey of 2023-24 had suggested that food should be excluded from inflation measure targeted by the Reserve Bank of India (RBI).
The RBI on August 6 sharply lowered its inflation forecast for 2025-26 to 3.1 percent from 3.7 percent earlier, thanks to easing food prices, a favourable monsoon, and adequate foodgrain stocks, while sticking to its outlook on growth at 6.5 percent.
The central bank will also soon issue a discussion paper on the flexible inflation targeting (FIT) framework, governor Sanjay Malhotra said on August 6. The final view will be taken by the government.
Headline inflation in FY26 so far in FY26 averaged around less than 3 percent, well within the RBI’s mandate of 4 percent. However, the central bank did caution about prices inching up in the last quarter of the current fiscal.
Change in CPI basket
A second source said that while the RBI may keep targeting the headline inflation rate, the weight of the “food and beverages" in the CPI basket, which is currently close to 46 percent, may come down.
The new CPI series will come into effect from February 2026, with 2024 as the base year. The current one is based on consumer spending patterns surveyed in 2011-2012.
“Some have felt of late that core inflation is a better target for RBI given volatility in food prices, since food inflation is more of a task of fiscal policy and less about monetary, but there is likely to be status quo since the weight of food in the new CPI basket will come down,” this source added.
Spending habits have changed significantly since the last CPI revision. In rural India, food now makes up 47 percent of total consumption expenditure, down from 52.9 percent in 2011-12. In urban areas, the share has fallen from 42.6 percent to 39.7 percent.
The Ministry of Finance did not respond to an email seeking comments on this development.
The central government’s keenness to stick to the 4-percent headline inflation target comes amid a debate around whether the RBI should explore an inflation targeting framework that excludes the volatile food component.
The Survey for 2023-24 had favoured this approach, citing that since hardships caused by higher food prices for poor and low-income consumers can be handled through direct benefit transfers or coupons for specified purchases valid for appropriate durations, the Monetary Policy Committee (MPC) can consider targeting an inflation rate that excludes food.
This was not the first time a debate around India's inflation targeting framework has come up. In fact, many experts have in the past highlighted the merits of aiming for core inflation, instead, which comes without the volatile food and fuel components.
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