The Reserve Bank of India's (RBI) inflation-targeting framework has been successful in maintaining price stability since its implementation in 2016. The framework, which sets a target of 4% inflation with a band of +/- 2%, has kept inflation under control for most of the time, except during the post-Covid era. In April 2022, domestic inflation surged to 7.8% due to supply-side issues caused by the Russia-Ukraine conflict.
The RBI responded by increasing the policy repo rate by 40 basis points (bps) in an off-cycle meeting, followed by another 50-bp hike in June. The terminal rate in the cycle was 6.5%, and the Monetary Policy Committee (MPC) did not cut rates until December 2024.
The flexible inflation-targeting framework has been effective in anchoring price expectations and establishing central bank credibility, according to economists. Sameer Narang, chief economist at ICICI Bank, noted that CPI inflation has averaged 4.6% since the implementation of FIT, down from 7.5% in the four years prior.
Some experts suggest refining the framework by including growth as an explicit mandate, citing the example of the US Federal Reserve's dual mandate for inflation and maximum employment. Gaura Sen Gupta, chief economist at IDFC First Bank, suggested that adding a clear mandate for growth would make the RBI more effective in supporting economic growth.