RBI deputy governor makes case for keeping 4% inflation target as India extends mandate to 2031

Key highlights:

India has locked in its inflation target for another five years, and the central bank’s deputy governor argues that staying the course is not inertia but a deliberate policy choice.

The government renewed the inflation target of 4% with a ±2% tolerance band through March 2031 on 25 March. Speaking in New Delhi on 5 May, RBI Deputy Governor Poonam Gupta said the renewal was “a policy choice of consequence.”

A decade of falling inflation

Before flexible inflation targeting was adopted in 2016, average headline inflation stood at 8.1%. After adoption, it fell to 4.6% – a decline of 3.5 percentage points. Inflation volatility also dropped, from 2.3% to 1.5%, according to RBI estimates.

Critics have argued that inflation targeting comes at the expense of growth. Gupta pushed back: “India’s experience does not bear this out,” she said, noting that price stability and growth have proved complementary.

The framework also proved resilient through two major tests – the pandemic and the post-2022 energy price shock – when inflation briefly breached the 6% ceiling.

Why 4% – and why headline inflation

India’s target sits at the upper end of emerging market and developing economies, which cluster between 2.5% and 4%. Advanced economies target around 2%. Gupta said the 4% level was initially recommended by an RBI expert committee as the rate at which macroeconomic conditions were optimised.

On headline versus core inflation, the RBI has consistently favoured headline. Food and fuel make up more than half of India’s consumption basket. Excluding them would be less representative and overlook the welfare of the poor.

An eye on 2031

The 2026 renewal followed an unusually open public consultation. The RBI posed four questions: should headline or core guide policy; is 4% still right; should the band be adjusted; and should India retain a point target or move to a simple 3-6% range? Responses favoured retaining the existing design.

Gupta left the door open for future change. If the growth-inflation mix over the next five years mirrors the past decade – robust growth, lower and more stable inflation – India could consider a slightly lower target and narrower band. But if the global environment remains challenging, the current framework’s predictability and flexibility would be warranted.

A decision on any tweak would wait until the next statutory review in 2031. “Much would depend on the experience of the next four years, which would be taken as input into the next review,” Gupta said.

For now, the message from the RBI is clear: the current setup is working. Change, if it comes, will be calibrated, debated, and years away.