Inflation is an economic concept defined as the persistent increase in the general price level of goods and services, which consequently reduces the purchasing power of the rupee. India's approach to managing its Price Dynamics is the Flexible Inflation Targeting (FIT) framework, a statutory mechanism.
The origin of this framework lies in the recommendations of the Urjit Patel Committee in 2014, which sought to replace the earlier "multiple-indicator approach" with a clear, institutional anchor for monetary policy. The Government of India and the Reserve Bank of India (RBI) signed the Monetary Policy Framework Agreement on February 20, 2015, and the framework was formally adopted in 2016.
The mechanism is enshrined in the Reserve Bank of India (RBI) Act, 1934, which was amended by the Finance Act, 2016. Section 45ZA of the amended Act mandates the Central Government, in consultation with the RBI, to set the inflation target every five years. The current target is 4% for CPI Headline Inflation, with a tolerance band of +/- 2%, meaning the rate should ideally remain between 2% and 6%. The six-member Monetary Policy Committee (MPC), established under Section 45ZB, is tasked with determining the policy repo rate to achieve this target. If inflation remains outside the 2% to 6% range for three consecutive quarters, the RBI must submit a report to the government explaining the failure and outlining remedial actions.
The framework connects the RBI's monetary policy, primarily through the repo rate, to the government's overall Fiscal Policy. The measure used is the Consumer Price Index (CPI), which tracks retail prices and includes volatile components like food and fuel, distinguishing it from Core Inflation.
The core of the framework has remained consistent, with the government recently retaining the 4% retail inflation target and the +/- 2% band for the five-year period from April 1, 2026, to March 31, 2031, reinforcing the existing FIT regime.