RBI's Poonam Gupta Defends 4% Inflation Target as Appropriate for India

"India is in the right company for its level of income, per capita income, size of the economy or complexity of the economy to be targeting 4% level. Inflation is not shown to be an outlier in any possible way," she said during her presentation on Inflation Targeting in India: The Past, The Present and The Future, held by NCAER.

She further added that "There seems to be very little reason to be moving away from this target for now."

India adopted the inflation targeting (IT) framework in 2016 after amendments to the RBI Act, with the Monetary Policy Committee (MPC) mandated to maintain headline CPI inflation at 4 per cent with a tolerance band of +-2 per cent. The framework was reviewed and renewed most recently on March 28, 2026, for another five years till 2031.

Gupta said the framework was debated extensively at the time of its adoption, with concerns that a singular focus on inflation could come "at the risk of not giving sufficient attention to growth." However, she noted that subsequent evidence suggests otherwise. Inflation targeting has resulted in "lower inflation level and lower volatility of inflation," and "these outcomes have not come at the cost of compromising the growth objective."

She also highlighted improvements in transparency and policy credibility. The framework has led to "a more engaging and transparent monetary policy," better coordination between fiscal and monetary authorities, and more "anchored expectations of inflation." She added that research indicates electoral fiscal cycles have become less prominent in countries that adopted inflation targeting.

Providing India-specific evidence, Gupta said average inflation has declined in the post-inflation targeting period, especially when excluding the COVID-19 years, and variability has also reduced compared to the pre-IT period.

On the choice of inflation metric, she said the headline Consumer Price Index (CPI) continues to be the preferred target. "More than 90 per cent of the respondents said that headline CPI should be the proper target," she said, based on feedback to the RBI's discussion paper, which received around 75 responses. While some respondents supported a role for core inflation, Gupta said international experience also backs headline inflation, with nearly 47-48 countries targeting headline inflation and only one targeting core.

She outlined the debate around excluding volatile components such as food and fuel. While food inflation is often supply-driven and less responsive to monetary policy, excluding it could risk reducing transparency and credibility. She noted that in India, food inflation volatility has moderated over time and its weight in the CPI basket has declined.

On the inflation target level, Gupta said stakeholder responses strongly supported retaining the current level. "Again, 90% said that the current inflation level is the right one and we should continue with it," she said. A few respondents suggested lowering it marginally, with only two proposing 3.5 per cent.

Regarding the tolerance band, she said the +-2 per cent range (2-6 per cent) has served India well, especially during external shocks such as the COVID-19 pandemic and the Russia-Ukraine conflict, when inflation temporarily exceeded the upper bound. "For the most part, India's inflation has remained within the band," she noted, adding that flexibility remains important amid global uncertainties.

On the question of shifting to a range-only system without a central target, Gupta said feedback was overwhelmingly against such a move. She noted that very few countries follow such a framework, citing examples like Australia, Israel and Thailand.

Looking ahead, she said future reviews may revisit the target level or band depending on macroeconomic outcomes. "If growth-inflation mix evolves... there could be a case to lower the level and narrow the band," she said, while emphasising the importance of continuity and credibility.

Gupta added that the RBI is working on improving transparency, including publishing core inflation data, enhancing communication, and expanding research output.

"It has been about 10 years since India adopted inflation targeting. The question is whether the framework has served well for India... and the evidence suggests that it has," she said.

- ANI