RBI To Maintain 4 Per Cent Inflation Target Until 2031: Centre

The central government has requested the Reserve Bank of India (RBI) to continue keeping the retail inflation at 4 per cent, with a tolerance band of 2 per cent on either side, for another five years ending March 31, 2031. The decision has been notified in a gazette by the Department of Economic Affairs with the consultation of the central bank on March 25.

This means that inflation is allowed to be within a range of 2 per cent to 6 per cent, and the target is fixed at 4 per cent. The renewed framework will come into force from April 1, 2026.

Second Extension of the Same Target

This is the second time that the central government has retained the same inflation target since the introduction of the framework. The inflation targeting framework was first implemented in 2016 for five years until March 2021. This was then extended in 2021 with no changes to the target or the tolerance band.

With the latest notification, the Centre has decided to extend the same structure for another five years, which is an indication of continuity in the monetary policy objectives.

Background of Inflation Targeting in India

India formally adopted the inflation targeting framework in 2016, which made it RBI's responsibility to keep inflation within a certain range. The Monetary Policy Committee (MPC), a six-member panel chaired by the RBI Governor, was mandated to decide on the policy interest rate needed to achieve this objective.

At its first meeting in October 2016, the MPC was mandated to keep annual inflation at 4 per cent with an upper limit of 6 per cent and a lower limit of 2 per cent.

Since then, the framework has not undergone any changes in its structure, despite the changes in the economy.

Inflation Trends over the Years

Over the last 10 years, inflation has been within the prescribed band for about three-fourths of the time. However, there have been times of volatility, especially during the period of the pandemic years and other global disruptions.

The middle phase of the inflation targeting period saw inflation moving closer to the upper tolerance line. This was largely influenced as a result of the pandemic and subsequently by external global factors such as the Russia-Ukraine conflict, which resulted in a rise in prices across the world.

In comparison, from the first years following 2016 and more recently, inflation has remained more stationary around the target of 4 per cent.

On average, inflation has abated since the implementation of the framework. Data shared by RBI shows that the average inflation rate stood at 4.9 per cent in the inflation targeting regime as compared to 6.8 per cent in the earlier period.

Recent Inflation Data

As per the latest RBI data, the retail inflation rose to 3.21 per cent in February from 2.74 per cent in January. The data is based on the Consumer Price Index (CPI), with the current base year set as 2024.
The CPI is the most important measure RBI uses to monitor inflation and make decisions on monetary policy.

Review Of The Framework

Ahead of the new five-year period, RBI undertook a review of the inflation targeting framework to check if any changes needed to be made. In August 2025, it published a discussion paper on it, asking stakeholders for their inputs.

The paper raised a number of questions. It asked whether headline inflation or core inflation should be in focus while formulating monetary policy due to the high weightage of food items in the CPI basket. It also looked at whether the 4 per cent target is still appropriate to balance growth and stability in a large and fast-growing economy.

Other questions included whether the tolerance band should be revised, narrowed, widened or removed, and whether the framework should move away from a fixed target to a range-based approach.

Despite these discussions, the central government has decided to maintain the current structure for the next period.

Importance Of Policy Stability

RBI has emphasised that the monetary policy frameworks need both certainty and credibility, especially in an uncertain world. Retaining a tested framework helps to anchor expectations and assist macroeconomic stability.

The flexibility that is already built into the system, in terms of the tolerance band, allows policymakers to respond to economic shocks without compromising the overall objective.

Global Context

Inflation targeting has now reached 35 years since its first introduction by New Zealand in 1990. Since then, it has become one of the most Comprehensive monetary policy frameworks all over the world.

India's experience with the framework has broadly been stable, with inflation becoming more predictable as compared to previous periods.