The central government on Wednesday notified a 4 per cent retail inflation target with a tolerance band of 2 percentage points on either side for a five-year period from April 1, 2026, to March 31, 2031.
According to a gazette notification issued by the Department of Economic Affairs under Section 45ZA of the RBI Act, 1934, the upper tolerance limit has been fixed at 6 per cent, while the lower limit is set at 2 per cent. The decision has been taken in consultation with the Reserve Bank of India (RBI), retaining the existing inflation-targeting framework.
This marks the second consecutive extension of the same target, after it was first introduced in 2016 and later continued in 2021. The framework formally mandates the RBI to maintain inflation around 4 per cent, with flexibility within the 2–6 per cent band.
India adopted the flexible inflation targeting (FIT) framework in 2016, with the six-member Monetary Policy Committee (MPC), headed by the RBI Governor, tasked with setting policy rates to achieve this objective. Over the past decade, inflation has remained within the prescribed band for roughly three-fourths of the time, although volatility increased during the pandemic and the Russia-Ukraine conflict.
Recent data shows retail inflation rose to 3.21 per cent in February from 2.74 per cent in the previous month. The latest Consumer Price Index (CPI) is based on a revised series with 2024 as the base year.
Ahead of this notification, the RBI had released a discussion paper in August 2025 seeking stakeholder feedback on key aspects of the inflation framework. These included whether headline or core inflation should guide policy, whether the 4 per cent target remains optimal, if the tolerance band needs revision, and whether a fixed target should be replaced with a range.
The RBI noted that the FIT framework has broadly performed well, with inflation averaging around 4 per cent in its early years and stabilising again in recent years after a spike during global disruptions. It emphasised the need for policy certainty and credibility, especially amid heightened global and domestic economic uncertainty.
Globally, inflation targeting has become the most widely adopted monetary policy framework since it was first implemented by New Zealand in 1990. In India, average inflation has declined to 4.9 per cent in the post-FIT period, compared to 6.8 per cent before its adoption.
With PTI inputs
