India adopted inflation targeting as the latest monetary policy framework with amendment of RBI Act, 1934 in May 2016, and assignment of CPI inflation target of 4 per cent to the RBI vide a Gazette Notification in August 2016. The target was required to be maintained with upper and lower tolerance limit of 6 and of 2 per cent, respectively. The same target and tolerance band has been extended in two subsequent target resetting exercise in 2021 an 2026.
Inflation targeting is widely regarded as a significant innovation, as it improved conduct of monetary policy in several ways.
It assigned an unambiguous legal mandate prioritizing price stability as the main monetary policy objective; accorded complete autonomy to RBI’s monetary policy committee (MPC) on setting policy rate through a transparent democratic process; and clearly fixed accountability by requiring RBI to write a report to the government if it fails to contain CPI inflation within the tolerance band for three consecutive quarters.
Assessing performance on price stability
Under the inflation targeting regime, there has been considerable improvement in inflationary outcome in India. The average CPI inflation was lower at 4.6 per cent during August 2016-December 2025, as compared to 7.4 per cent during January 2013-July 2016 (based on the same CPI series).
It was accompanied by greater price stability as the standard deviation of CPI inflation declined to 1.9 from 3.2 during the comparable period. There is just one occasion since adoption of inflation targeting when the RBI failed to keep inflation below 6 per cent for three consecutive quarters, and consequently had to write a report to the government.
Moreover, only in 11 out of 38 quarters under the new regime, CPI inflation was above 6 per cent. There was not a single quarter in which inflation was above 8 per cent or negative. Notwithstanding several bouts of supply side shocks arising from Covid pandemic, geopolitical conflicts due to Russia-Ukraine war and Israel-US versus Iran conflict, etc. such performance on price stability deserves due appreciation.
Flexibility on growth objective
Claudio Borio and Matthieu Chavaz in their recent research paper that appeared in BIS Quarterly Review, March 2025 (Moving Targets? Inflation targeting frameworks, 1990-2025) observed that leading inflation targeting central banks have shown a trend of greater flexibility in terms of assigning reasonable weight on the objective of employment/output. The above trend was found to be stronger in advanced economies. Was a similar pattern evident in India?
An empirical analysis was undertaken to assess if the RBI sidestepped the growth objective, at the expense of excessive focus on the inflation objective under the new regime.
Using a Taylor rule based econometric analysis, we observed that post-inflation targeting, RBI’s monetary policy response assigned higher weight to inflation objective as compared to growth objective. The coefficient capturing the monetary policy response to deviation of inflation from target was estimated to be 3.92, as compared to that for economic growth at 1.53. Both were found to be statistically significant.
This above pattern underscores that while RBI’s monetary policy has accorded high priority on the objective of price stability under inflation targeting, it has not abandoned its responsibility to contain short-term economic growth fluctuations. It alleviates the concerns expressed by some experts about the relevance of inflation targeting regime in the Indian context, particularly as regards evading the growth considerations in conduct of monetary policy.
The writer is Professor, Department of Economics, Pondicherry University, Pondicherry and former Member, 6th State Finance Commission, Government of Odisha
Published on April 20, 2026