Due to the likelihood of a decrease in the weight of food in the CPI basket, the RBI may continue to target headline inflation, with a goal to keep the rate at 4% and a tolerance range of 2% on each side. The current structure will remain in place until March 2026.
Govt Backs Inflation Framework
According to people who spoke to Moneycontrol, the central government supports keeping the present inflation targeting framework starting in FY27, despite talks on whether monetary policy should focus on non-food inflation.
Established in 2016, the current flexible inflation targeting framework assigns the RBI the responsibility of maintaining retail inflation, as measured by the Consumer Price Index, at 4 percent over the medium term, with a 200 basis point (or 2 percentage point) range on each side.
They are reviewing the present targeted framework, which is in effect until March 2026.
Inflation Target Framework Extended
Initially established for a five-year term (2016–21), the government extended the framework, known as the flexible inflation targeting (FIT) framework, for a further five years (2021–26).
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“Until March of the following year, the inflation targeting mechanism is in force. One of the sources mentioned that they believe inflation remains comfortably within the target range, so a review is unnecessary.
Food should not be part of the Reserve Bank of India’s (RBI) inflation Target, according to the session 2023–2024 of Economic Survey of india.
RBI Lowers Inflation Forecast
On August 6, the RBI maintained its GDP prediction at 6.5 percent but reduced its inflation forecast for 2025–2026 to 3.1 percent from 3.7 percent before, citing a favorable monsoon, dropping food prices, and sufficient foodgrain inventories.
Compared to the RBI’s objective of 4 percent, headline inflation in FY26 has so far averaged less than 3 percent. The central bank did, however, issue a warning on prices gradually rising in the last quarter of the current fiscal year.
CPI basket change
A second source indicates that the weight of “food and beverages” in the CPI basket, which is now at 46%, may decrease even if the RBI may still aim for the headline inflation rate.
2024 will serve as the base year for the new CPI series, which will take effect in February 2026. The current one is based on a 2011–2012 study of consumer purchasing trends.
The source suggests that the CPI basket will likely see a reduced weight for food items, keeping the overall situation largely unchanged. However, some believe the RBI should focus more on core inflation, as food prices are highly volatile and better addressed through fiscal measures rather than monetary policy.
Urban Spending Share Falls
Since the last CPI review, consumer spending patterns have shifted notably. The percentage has decreased from 42.6 percent to 39.7 percent in metropolitan regions.
When contacted by email for comments on this change, the Ministry of Finance did not respond.
Amid a debate over whether the RBI should review an inflation targeting framework that removes the unstable food component, the central government is keen to stick to the 4-percent headline inflation goal.
Push for Core Inflation
This strategy was supported by the 2023–24 Survey, which stated that the Monetary Policy Committee (MPC) could think about aiming for an inflation rate that does not include food since the hardships that poor and low-income consumers face as a result of rising food prices can be reduced through direct benefit transfers or coupons for specific purchases that are valid for the appropriate amount of time.
India’s inflation targeting mechanism has been the subject of discussion before. Actually, a number of experts have already highlighted the benefits of trying for core inflation, which excludes the unstable components of food and fuel.