FLEXIBLE INFLATION TARGETING IN INDIA: An Empirical Assessment of Price Stability and Economic Growth (2016–2025)

Abstract

India's adoption of the Flexible Inflation Targeting (FIT) framework in August 2016 marked a decisive break from the multiple-indicator approach that had guided the Reserve Bank of India (RBI) for over two decades. Under Section 45ZA of the amended RBI Act, 1934, the Government of India, in consultation with the RBI, now sets a numerical inflation target once every five years, currently 4 per cent Consumer Price Index (CPI) inflation with a tolerance band of ±2 percentage points. This paper undertakes an empirical assessment of that framework a decade on, using annual data on CPI inflation, real GDP growth, and the policy repo rate published by the Ministry of Statistics and Programme Implementation (MOSPI), the Reserve Bank of India, and the World Bank. The study is built around two specific objectives: first, to analyse the trend behaviour of inflation and growth before and after the adoption of FIT; and second, to evaluate whether the framework has delivered durable price stability without imposing a discernible cost on output growth. The analysis shows that average CPI inflation fell from roughly 6.8 per cent in the four years preceding FIT (2012–16) to about 4.7 per cent in the decade since, while average real GDP growth has been broadly maintained, aided by a swift post-pandemic recovery. At the same time, the paper documents episodes of tolerance-band breach most notably during 2020–22  driven largely by supply-side food and fuel shocks that monetary policy alone could not address. The paper concludes that FIT has meaningfully anchored inflation expectations and improved the credibility and transparency of Indian monetary policy, even as structural vulnerabilities linked to food-price volatility, monsoon dependence, and imported energy costs continue to test the framework's limits. The Government's decision in March 2026 to retain the 4 per cent target with the same tolerance band for a third consecutive review period (2026–31) is read, in this paper, as an endorsement of the framework's broad success, alongside a caution that its next phase must grapple more directly with core-versus-headline measurement questions.