Flexible Inflation Targeting (FIT) Framework

Flexible Inflation Targeting (FIT) is the system under which the RBI's main job is to keep retail inflation close to a number fixed by the government. In India, that target is 4%, measured by the Consumer Price Index (CPI), with a band of 2% to 6%. It is "flexible" because the RBI may also keep economic growth in mind and does not have to hit 4% exactly every month.

Why does it exist?

Before 2015, the RBI followed a multiple indicator approach. It looked at many things at once: inflation, growth, the exchange rate, credit growth. This made it hard to know what the RBI was really aiming for. India also had high inflation in the years around 2010-2013, often near or above 9-10%. High inflation hurts the poor the most, because their income does not rise as fast as prices.

A single clear target gives the RBI an anchor. People and businesses then expect inflation to stay near 4%. When workers and firms expect low inflation, they ask for smaller wage and price increases, which helps keep inflation low. This is called anchoring inflation expectations.

Where did it come from?

• January 2014: The Urjit Patel Committee report recommended CPI-based inflation targeting, with a 4% target and a ±2% band.
• 20 February 2015: The Monetary Policy Framework Agreement between the government and the RBI formally adopted FIT.
• 2016: The Finance Act, 2016 amended the RBI Act. Section 45ZA lets the Central Government, in consultation with the RBI, set the inflation target once every five years.
• 5 August 2016: The first target was notified: 4% CPI inflation, band 2%-6%, for August 2016 to 31 March 2021.
• 31 March 2021: The target was kept unchanged for April 2021 to March 2026.
• August 2025: The RBI released a discussion paper reviewing the framework. It asked whether to target headline or core inflation, and whether 4% was still right.
• 25 March 2026: The Department of Economic Affairs notified that the target stays at 4%, with a 2%-6% band, for 1 April 2026 to 31 March 2031. This was the second renewal.

How does it work, step by step?

1. The government fixes the target (4% ±2%) every five years.
2. The MPC studies inflation forecasts and growth and sets the repo rate to steer inflation towards 4%. The Monetary Policy Committee (MPC) is set up under Section 45ZB of the RBI Act. It has six members: three from the RBI (the Governor, who chairs it, a Deputy Governor and one RBI officer) and three experts appointed by the Central Government.
3. If inflation is expected to rise above target, the MPC raises rates. If it is expected to fall well below, it can cut.
4. Accountability: If average inflation stays above 6% or below 2% for three consecutive quarters, the RBI is said to have failed (rules under the RBI Act).
5. Under Section 45ZN, the RBI must then send a report to the Central Government within one month. The report explains why it failed, what it will do, and how long it expects to take to bring inflation back.

Has the RBI ever failed?

Yes, once so far. Inflation stayed above 6% for the three quarters from January to September 2022, after the Russia-Ukraine war pushed up food and fuel prices. In November 2022, the MPC held a special meeting and the RBI sent its first-ever failure report to the government.

Which inflation is targeted: headline vs core

• Headline CPI inflation is the price rise of the whole basket of goods and services households buy, including food and fuel. India targets headline CPI.
• Core inflation leaves out food and fuel, which jump around a lot because of weather or global oil prices.
• Some argue India should target core inflation because the RBI cannot control food prices. Others say food is a large part of what poor families spend, so headline inflation is what people actually feel. The 2026 renewal kept headline CPI.

How CPI is measured

India's CPI is compiled by the National Statistics Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) and released every month. A new CPI series with base year 2024 was released on 12 February 2026, replacing the 2012 base. It uses the Household Consumption Expenditure Survey 2023-24 for weights. It tracks 358 items (308 goods and 50 services).

Food and beverages now have a much lower weight (36.75%, down from 45.86%), and housing has a higher weight (17.67%, up from 10.07%). Because food prices jump around a lot, a lower food weight makes headline CPI a little less swingy.

Real interest rate: why the target matters for rate decisions

The real interest rate is the interest rate minus inflation. If the repo rate is 5.25% and expected inflation is 5.5%, the real rate is negative (about −0.25%). A negative real rate means borrowing is effectively "free" after price rise, which can push demand and prices up further. So when inflation rises towards or above the repo rate, the MPC often raises rates to keep the real rate positive.

India's position and comparison with others

India is one of many countries that target inflation. New Zealand was the first, in 1990. The UK, Canada and others target about 2%. India's target is higher (4%) because a fast-growing, developing economy usually has higher natural price rise, and food has a large share in household spending.

Commonly confused concepts

• Inflation target (4%) vs tolerance band (2%-6%): The target is where the RBI aims. The band is the zone of acceptable deviation. Going outside the band for three quarters in a row counts as failure. Going outside it for one month does not.
• Who sets the target vs who meets it: The government (with RBI consultation) sets it under Section 45ZA. The MPC tries to meet it using the repo rate.
• CPI vs WPI: CPI measures prices paid by consumers in shops and includes services. WPI (Wholesale Price Index) measures prices in bulk trade between businesses and covers mainly goods. India targets CPI, not WPI.
• Disinflation vs deflation: Disinflation means inflation is falling but still positive (from 6% to 4%). Deflation means prices are actually falling (inflation below 0%).
• Strict vs flexible inflation targeting: Strict targeting looks only at inflation. Flexible targeting also gives weight to growth, as India's framework does.

Issues, criticism and the way forward

• Supply shocks: Food and fuel price jumps (bad rains, wars, oil prices) are outside the RBI's control, yet they drive headline CPI.
• Growth cost: Raising rates to fight supply-driven inflation can hurt growth and jobs without fixing the root cause.
• Fiscal-monetary coordination: Government actions, such as fuel tax cuts, food stock releases and import duty changes, often matter as much as the repo rate in controlling price rise.
• Success so far: Supporters point out that average inflation has been lower and more stable since 2016 than in the decade before, and that inflation expectations are better anchored.
• Way forward: Experts suggest better food supply management, faster transmission of rate changes, clearer communication by the MPC, and using the new CPI series to track price pressures more accurately.

Concepts to Know

• Headline inflation: Inflation for the full CPI basket, including food and fuel.
• Core inflation: Inflation after removing food and fuel, showing the underlying trend.
• Inflation expectations: What people and businesses think inflation will be in future. If they expect high inflation, they raise prices and demand higher wages, which can make inflation real.
• Base year: The year used as the reference point (index = 100) to compare price changes.
• Supply shock: A sudden fall in supply, like a drought or an oil crisis, which pushes prices up even if demand has not changed.
• Quarter: A three-month period. A year has four quarters.