4 percent inflation target can be tweaked if prices remain stable, growth robust: RBI Dy. Governor
May 05, 2026
In the third review in March, the government, in consultation with the RBI, notified the inflation target framework for a five-year period through March 31, 203
MUMBAI: The government and RBI could consider lowering the inflation target and narrowing the tolerance band if growth remains robust and prices remains stable over the next five years, RBI deputy governor Poonam Gupta has said even as she defended the 4% inflation targeting framework with the plus or minus 2% leeway.
However, if the global environment remains as challenging as it has been during the past six years, it would warrant both predictability and flexibility inherent in the existing framework, she said while addressing the a seminar on ‘Inflation targeting framework and regional economic outlook for Asia and Pacific’ organised by the policy think-tank NCAER in New Delhi on Tuesday.
In the third review in March, the government, in consultation with the RBI, notified the inflation target framework for a five-year period through March 31, 2031 retaining the original 4% target set in 2026. Under this framework, the Reserve Bank has to keep inflation at 4% (+/-2%) from FY27 through FY31.
Gupta said the future of the inflation targeting framework would depend on the combination of inflation and growth outcomes as they evolve during the next five years. Also, the future inflation targeting framework would have to take into account the global shocks that the economy may have to weather.
"If growth-inflation mix evolves as it has in the past 10 years in the sense that we continue to have robust growth and lower and more stable inflation, perhaps one could consider going the way other economies have gone," Gupta, who is in charge of the monetary policy department at the central bank, said.
"Perhaps there would be a case to lower the 4% level and narrow the band. But much would depend on the experience of the next four years, which would be taken as input into the next review," she said, adding going by international experience, it would point towards a slightly lower inflation target and a slightly narrower band.
Defending the 4% inflation target maintained for the third time with a %2 tolerance band for the next years, Gupta said there is "very little reason to be moving away from this target for now,” as the frequency and intensity of external shocks that every economy has been facing lately, perhaps the band size remains quite valid.
"Our own experience and international experiences convey that a plus-minus 2% tolerance band has served the aim. Especially providing the flexibility needed to absorb large external shocks which have been impacting us, and they don't seem to be abating," Gupta said.
The RBI has projected headline inflation to average 4.6% in FY27 given the ongoing oil shock and the rupee depreciation.
Stating that the inflation targeting framework has delivered, Gupta said the experience so far has been broadly positive, with both price stability and growth holding up over the past decade. “Inflation has declined and stabilised,” she said pointing out that average headline inflation fell from 8.1% in the pre-inflation targeting period to 4.6% after its adoption and that inflation targeting has not hurt our growth so far.
“Our experience does not bear this out (hurting growth), as price stability and growth have thus proved complementary rather than conflicting objectives under the Indian framework,” she said, adding inflation expectations have become better anchored now while policy credibility and transparency have improved under the current regime and that both domestic feedback as well as global experience support retaining the existing design of monetary policy.
Importantly, the RBI sees continuity in the framework as a deliberate policy choice at a time of rising global risks. “The decision to preserve the framework's core architecture… is a policy choice of consequence and the latest review strengthens the framework precisely when it is most needed,” she said.
However, if the global environment remains as challenging as it has been during the past six years, it would warrant both predictability and flexibility inherent in the existing framework, she said while addressing the a seminar on ‘Inflation targeting framework and regional economic outlook for Asia and Pacific’ organised by the policy think-tank NCAER in New Delhi on Tuesday.
In the third review in March, the government, in consultation with the RBI, notified the inflation target framework for a five-year period through March 31, 2031 retaining the original 4% target set in 2026. Under this framework, the Reserve Bank has to keep inflation at 4% (+/-2%) from FY27 through FY31.
Gupta said the future of the inflation targeting framework would depend on the combination of inflation and growth outcomes as they evolve during the next five years. Also, the future inflation targeting framework would have to take into account the global shocks that the economy may have to weather.
"If growth-inflation mix evolves as it has in the past 10 years in the sense that we continue to have robust growth and lower and more stable inflation, perhaps one could consider going the way other economies have gone," Gupta, who is in charge of the monetary policy department at the central bank, said.
"Perhaps there would be a case to lower the 4% level and narrow the band. But much would depend on the experience of the next four years, which would be taken as input into the next review," she said, adding going by international experience, it would point towards a slightly lower inflation target and a slightly narrower band.
Defending the 4% inflation target maintained for the third time with a %2 tolerance band for the next years, Gupta said there is "very little reason to be moving away from this target for now,” as the frequency and intensity of external shocks that every economy has been facing lately, perhaps the band size remains quite valid.
"Our own experience and international experiences convey that a plus-minus 2% tolerance band has served the aim. Especially providing the flexibility needed to absorb large external shocks which have been impacting us, and they don't seem to be abating," Gupta said.
The RBI has projected headline inflation to average 4.6% in FY27 given the ongoing oil shock and the rupee depreciation.
Stating that the inflation targeting framework has delivered, Gupta said the experience so far has been broadly positive, with both price stability and growth holding up over the past decade. “Inflation has declined and stabilised,” she said pointing out that average headline inflation fell from 8.1% in the pre-inflation targeting period to 4.6% after its adoption and that inflation targeting has not hurt our growth so far.
“Our experience does not bear this out (hurting growth), as price stability and growth have thus proved complementary rather than conflicting objectives under the Indian framework,” she said, adding inflation expectations have become better anchored now while policy credibility and transparency have improved under the current regime and that both domestic feedback as well as global experience support retaining the existing design of monetary policy.
Importantly, the RBI sees continuity in the framework as a deliberate policy choice at a time of rising global risks. “The decision to preserve the framework's core architecture… is a policy choice of consequence and the latest review strengthens the framework precisely when it is most needed,” she said.