RBI opens debate on revamping MPC’s flexible inflation targeting framework, signals biggest rethink since 2016

The Reserve Bank of India (RBI), central bank, has issued a discussion paper on reviewing the monetary policy framework. The discussion paper invites suggestions from stakeholders and the public on whether India’s inflation-targeting approach, which has guided monetary policy for nearly a decade, requires revision.

In a discussion paper issued on August 21, 2025, the RBI has posed four critical questions that could shape how interest rates are set and how growth is balanced with price stability from 2026 onwards.

The paper notes that, under the amended RBI Act, 1934, the central government, in consultation with the central bank, is required to review the inflation target every five years. The current goal of 4% consumer price index (CPI) inflation, with a tolerance band of 2–6%, was extended in 2021 and is due for review in March 2026.

“In the coming years, the practice of inflation targeting as a monetary policy framework may encounter even greater challenges due to emerging geo-economic uncertainties, commodity price volatility, climate change, and innovations in payment systems that can alter the nature of policy trade-offs. Against this backdrop, this review provides an opportunity to revisit some of the fundamental principles of the framework to guide the economy towards better macroeconomic outcomes in the best interests of all stakeholders,” stated the discussion paper.

The first significant question the RBI has raised is whether policy should continue to focus on headline inflation or shift towards core inflation, which excludes volatile food and fuel prices.

The report notes that food remains a significant component of the CPI basket and influences household expectations, but it also recognises that food prices are mainly driven by supply shocks outside the RBI’s control.

“Whether headline inflation or core inflation would best guide the conduct of monetary policy... is the first question for feedback.”

The second issue is whether the 4% target remains optimal for India’s growth–inflation balance. The RBI notes that the number was chosen in 2016 based on economic conditions at that time; however, global and domestic realities have since evolved. “Whether the 4% inflation target continues to remain optimal for balancing growth with stability in a fast-growing, large emerging economy like India?" stated the MPC discussion paper.

The third question relates to the tolerance band of +/- 2%. The RBI has inquired whether this range should be narrowed, widened, or even eliminated. A narrower band could enforce stricter price discipline but reduce flexibility, whereas a wider one might aid in managing supply shocks but could weaken credibility.

Should the tolerance band around the target be revised in any way, such as narrowing, widening, or eliminating it altogether?, as mentioned in the discussion paper.

Finally, the paper also considers the possibility of abandoning a fixed target altogether and instead adopting a range-only system. This would mean that as long as inflation remains within a specified band, no precise “mid-point” such as 4% would be emphasised.

Should the target inflation level be removed and only a range maintained within the overall scope of retaining flexibility without undermining credibility?" per the discussion paper.

The discussion paper also noted that submissions do not need to address all listed issues and can concentrate on areas of interest. Stakeholders and the public can submit comments and feedback on the issues for discussion by email by 18 September 2025.

By posing these four challenging questions, the central bank has signalled that India’s monetary policy framework could experience its most substantial re-evaluation since 2016.