Government Extends RBI's Inflation Target Mandate for Five More Years
The Indian government has officially extended the Reserve Bank of India's (RBI) mandate to maintain retail inflation at 4 percent, with a tolerance band of 2 percentage points on either side, for an additional five-year period ending March 31, 2031. This decision continues the flexible inflation-targeting framework that was first introduced in 2016 and previously extended in March 2021.
Notification and Framework Details
According to a gazette notification issued by the Department of Economic Affairs on March 25, the central government, in consultation with the RBI, has notified the inflation target for the period from April 1, 2026, to March 31, 2031. The notification specifies that the inflation target remains at 4 percent, with an upper tolerance level of 6 percent and a lower tolerance level of 2 percent.
India formally adopted the inflation-targeting regime in 2016, when the six-member Monetary Policy Committee (MPC), headed by the RBI governor, was tasked with keeping annual retail inflation aligned to the 4 percent target until March 31, 2021. The framework was subsequently extended for another five-year period in 2021.
Historical Performance and Current Data
Over the past decade, retail inflation has remained within the prescribed band for nearly three-quarters of the time, although volatility increased during the pandemic years. The latest official data shows retail inflation rising to 3.21 percent in February from 2.74 percent in the previous month. The Consumer Price Index (CPI) released earlier this month is based on a new series with a base year of 2024.
RBI's Assessment and Discussion Paper
Against the backdrop of the upcoming review effective from April 1, 2026, and evolving global and domestic economic conditions, the RBI undertook an assessment of the nature and format of the inflation target. In August 2025, the central bank issued a discussion paper seeking stakeholder feedback on several key issues:
- Whether headline inflation or core inflation should guide monetary policy.
- Whether the 4 percent target remains optimal for balancing growth and stability.
- Whether the tolerance band around the target requires revision.
The paper also explored whether the target level should be replaced with a range-based framework while maintaining flexibility and policy credibility. It noted that inflation performance during the nine years of flexible inflation targeting showed a "hump-shaped" trajectory. The first three years and the most recent three years broadly aligned with the target, while the intervening period saw inflation trends move closer to the upper tolerance band amid disruptions such as the Covid-19 pandemic and the Russia-Ukraine conflict.
Global Context and RBI's Perspective
The RBI paper emphasized that monetary policy frameworks require both certainty and credibility, particularly in an environment marked by heightened global uncertainty. It suggested that the existing framework's built-in flexibility should be used to steer macroeconomic outcomes. Globally, inflation targeting has become the most widely adopted monetary policy framework since New Zealand first introduced it in 1990.
The RBI paper noted that average inflation in India has moderated to around 4.9 percent since the adoption of flexible inflation targeting, compared with an average of 6.8 percent in the pre-framework period under the current data series. This extension aims to provide stability and predictability in monetary policy as India navigates complex economic challenges in the coming years.
