Govt retains inflation target at 4% with 2–6% band for next five years

The central government has retained India’s retail inflation target at 4%, with a tolerance band of 2% to 6%, for the next five years, according to an official notification issued on Wednesday. The revised mandate will remain in force for the period from April 1, 2026 to March 31, 2031, continuing the inflation-targeting framework followed since 2016.

In the notification issued under Section 45ZA of the Reserve Bank of India Act, 1934, the government, in consultation with the Reserve Bank of India (RBI), confirmed that the inflation target will remain at 4%, with an upper tolerance limit of 6% and a lower limit of 2%. The decision effectively keeps the existing framework unchanged, giving the central bank continuity in monetary policy.

The Centre has adopted formal inflation targeting in 2016, assigning the RBI the responsibility of maintaining consumer price inflation within the band set by the government. The framework was last reviewed in 2021. The RBI’s Monetary Policy Committee (MPC), which includes three RBI officials and three government-appointed members, is responsible for setting interest rates to keep inflation within the target range.

Economists said retaining the current band provides policy stability at a time when global uncertainties remain high. Retail inflation has eased in recent months, with consumer price inflation at 2.75% in February, but risks remain due to rising global oil prices and supply disruptions linked to tensions in West Asia. Higher fuel costs could push inflation closer to or above the 4% target in the coming financial year.

Analysts noted that the existing ±2% tolerance band gives the RBI flexibility to deal with temporary supply shocks without reacting too aggressively on interest rates. The current geopolitical situation, including the West Asia conflict, poses both downside risks to growth and upside risks to inflation, making policy flexibility important.

There had been calls in recent years to review the inflation-targeting framework, particularly because food prices often cause sharp but temporary spikes in inflation. Some policymakers had suggested focusing more on core inflation, which excludes food and energy, since interest rate changes have limited impact on food prices.

However, recent changes in the consumer price index, including a lower weight for food items, are expected to reduce volatility. The RBI has also indicated support for continuing the current framework, saying it has helped anchor inflation expectations over the past decade.

With the target unchanged, the RBI is expected to continue balancing growth and inflation risks as it prepares for its next policy decision.

(With agency inputs)