RBI’s CPI Inflation Framework
- Blogs
- September 15, 2025
Syllabus: GS3/Economy
In News
- Former MPC members recommended retaining India’s Flexible Inflation Targeting (FIT) with 4% CPI target ±2% band.
- Justified by its role in stabilising inflation expectations & sustaining growth.
Background
- Before 2016: India had no formal inflation targeting. RBI used a multiple-indicator approach (WPI, exchange rate, credit, etc.).
- Post 2014 Urjit Patel Committee → recommended adopting CPI-based FIT.
- Amendment to RBI Act (2016): Formalised inflation targeting framework.
- Monetary Policy Committee (MPC) created: 6 members (3 RBI, 3 Govt).
Framework:
- Target: 4% CPI inflation (tolerance band 2%–6%).
- Measured by: CPI Combined (rural + urban), base year 2012.
- Tenure: 5 years (last renewed in 2021 till March 2026).
Why CPI (not WPI)?
- CPI reflects cost of living & consumer purchasing power.
- WPI ignores services, which are 50%+ of India’s GDP.
- CPI has wider social & welfare implications.
Significance
- Anchors expectations → businesses, consumers plan better.
- Transparency → RBI accountable if inflation breaches band for 3 consecutive quarters.
- Global alignment → follows advanced economy practices (UK, New Zealand, etc.).
- Macro stability → 2016–2020 inflation averaged ~3.9%, down from pre-2014 double digits.
Challenges
- Food inflation dominance (50%+ CPI basket).
- Imported inflation (oil, commodities) beyond RBI’s control.
- Conflict with growth needs (higher interest rates may slow investment).
- Rural vs. urban CPI divergence.
Do You Know?
- India’s CPI basket has 299 items (rural) & 310 items (urban).
- The weight of food in CPI: 45.86% (rural) vs. 29.62% (urban).
- MPC decisions need majority; Governor has casting vote in case of tie.