Flexible Inflation Targeting (FIT) Framework
Why in News?
The Flexible Inflation Targeting (FIT) Framework is currently in the news due to the Government of India's notification retaining the 4% CPI inflation target with a ±2% tolerance band (2%-6%) for the period 2026-2031, following the second five-year review completed in March 2026.
Core Framework & Target
- Target Metric: The framework uses Headline Consumer Price Index (CPI) as the primary nominal anchor for inflation.
- Numerical Target: The target is set at 4%.
- Tolerance Band: A flexibility of ±2% is provided, creating an operational range of 2% to 6%.
- Review Cycle: The target is reviewed every five years by the Central Government in consultation with the RBI.
Institutional Mechanism
- Monetary Policy Committee (MPC): A six-member statutory body (3 from RBI, 3 external experts) responsible for determining the Repo Rate to achieve the inflation target.
- Primary Objective: To maintain price stability while keeping in mind the objective of growth (enshrined in the amended RBI Act, 1934).
- Accountability: If inflation stays outside the 2–6% band for three consecutive quarters, it is considered a "failure." The RBI must then submit a formal report to the government explaining the reasons, remedial actions, and an estimated timeframe for recovery.
Performance & Impact (2016–2026)
- Inflation Reduction: Average inflation dropped significantly to 4.9% during the FIT period, compared to 6.8% in the four years prior to its adoption.
- Anchoring Expectations: FIT has helped stabilize long-term inflation expectations among businesses and households.
- Resilience: The framework successfully managed severe shocks, including the COVID-19 pandemic and the Russia-Ukraine conflict, which briefly pushed inflation toward the 6% upper limit.
Key Debates & Future Considerations
- Headline vs. Core: There was a debate on whether to switch to Core Inflation (excluding volatile food/fuel), but the government retained Headline CPI because food accounts for nearly 46% of the Indian consumption basket.
- Base Year Revision: A new CPI series with 2024 as the base year was introduced in early 2026 to better reflect modern consumption patterns.
- Supply-Side Shocks: Experts continue to emphasize that while the RBI manages demand via interest rates, supply-side management by the government (for food and fuel) remains critical to meeting the 4% target.
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