Informist, Friday, Jul. 25, 2025

--RBI Malhotra: To bring discussion paper on flexible inflation targeting

--RBI Malhotra: Flexible inflation targeting helped lower inflation

--RBI Malhotra: Flexible inflation targeting has been a success

NEW DELHI – The Reserve Bank of India will come out with a discussion paper seeking comments from stakeholders on the flexible inflation targeting framework that is up for review in the financial year started April, Governor Sanjay Malhotra said Friday. "We will be inviting comments...we will be consultative," Malhotra said at the Modern BFSI Summit organised by Financial Express in Mumbai. After receiving the comments, the central bank will advise the government on the framework, and the latter will take a final call on it, he said.

The existing framework is set to lapse on Mar. 31, 2026. Under the monetary policy framework, the government has kept 4% as the CPI inflation target for Apr. 1, 2021 to Mar. 31, 2026, with the upper and lower tolerance limits of 6% and 2%, respectively. The government, in consultation with the RBI, determines the inflation target in terms of the CPI, once in five years.

His comments on the flexible inflation targeting framework were in response to a question on whether the central bank should look at targeting inflation without the food basket. Malhotra said while food prices show more volatility than core inflation and headline inflation, the framework currently in place has served us well over the years and considerably helped lower inflation. Besides the framework, the government's efforts have also helped rein in inflation, he added.

In the past, there have been calls for India to target non-volatile core inflation rather than headline inflation. The Economic Survey for 2023-24 (Apr-Mar) argued that India's inflation targeting framework should consider excluding food inflation, as higher food prices are often not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth, it said, adding that it is "worth exploring whether India's inflation targeting framework should target the inflation rate excluding food". The central bank, however, has maintained that it is focused on anchoring headline inflation.

The RBI's Monetary Policy Committee had kept interest rates unchanged between March 2023 and January 2025 as high food prices had made it challenging for the headline inflation print to align with the 4% target. However, since February this year, the rate-setting panel has lowered the policy repo rate by 100 basis points to 5.50%, as the inflation outlook has turned benign, with food prices remaining under control.

On Wednesday, a study by the central bank's staff had said that the flexible inflation targeting framework has "successfully" aided in stabilising inflation expectations. "Monetary policy actions are found to effectively anchor inflation expectations," the study said.

The Monetary Policy Committee will hold their next meeting in August, in which they are widely expected to keep the interest rate unchanged at 5.50%. End

Reported by Priyasmita Dutta

Edited by Tanima Banerjee

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