RBI's Monetary Policy Framework and Inflation Targeting
The Reserve Bank of India operates under a flexible inflation targeting (FIT) framework established through amendments to the RBI Act, 1934 (Section 45ZA inserted by the Finance Act, 2016). The Monetary Policy Committee (MPC), a six-member body (three RBI officials including the Governor + three government-appointed external members), sets the policy repo rate to keep CPI inflation at 4% within a tolerance band of ±2 percentage points (i.e., 2–6%).
A conflict-driven inflationary shock creates a dilemma for the MPC: raising rates to contain inflation slows growth (which is already under the threat of geopolitical uncertainty-driven investment slowdown), while keeping rates accommodative allows inflation expectations to become unanchored. The RBI had cumulatively cut the repo rate by 100 basis points from February 2025 to reach 5.5% by mid-2025, signalling a growth-supportive stance; a sustained oil price spike could force a reversal of this easing cycle.
- Flexible inflation targeting (FIT): established under RBI Act, 1934, Section 45ZA (Finance Act 2016)
- MPC composition: 6 members — RBI Governor (chair), Deputy Governor, one RBI officer, 3 external government nominees
- CPI inflation target: 4%, tolerance band 2–6%
- Failure to maintain target: If inflation remains outside 2–6% for 3 consecutive quarters, RBI must report to government explaining reasons and remedial action
- Repo rate as of mid-2025: 5.5% (after 100 bps of cumulative cuts from February 2025)
- CPI in January 2026: 2.75% — comfortably within target before the West Asia conflict escalated
● Tracked since March 06, 2026 · last seen April 13, 2026 · updates as the daily brief publishes