RBI Panel Expected to Advise Retaining 4% Inflation Target

India's retail/consumer inflation 📉, which depicts the rising price of goods and services purchased by consumers, has been on a remarkable cooling streak. The Consumer Price Index (CPI) inflation rate eased to 3.2% year-over-year in April 2025, marking a six-year low 🟢, and further decreased to 2.28% in May 2025, the lowest since early 2019.

In early June 📅, the RBI lowered its inflation forecast to 3.7% from 4% for FY 2025-26. However, the internal RBI panel is preparing to recommend to the government that India’s inflation framework be anchored at 4% headline CPI target 🎯.

This projection, well within the 2-6% tolerance band ✅, should be adhered to through the next 5-year policy ending 2031. The current framework’s expiry is due in March 2026, and the committee is expected to finalise its recommendation by 2025.

Why the RBI Hasn’t Changed the Inflation Target for the Last 4 Quarters

India’s inflation-targeting regime, formally adopted in 2016 🗂️, mandates the RBI to maintain CPI inflation at 4%, with a tolerance band of ±2 %, reviewed every five years. The next formal review is scheduled for March 2026 📌, although internal assessments are conducted periodically.

Over the last four quarters, the RBI has refrained from altering its inflation target—even as actual inflation fluctuated—largely because:

These short-term variations in inflation could unsettle bond markets 📉 and investors 💰. Secondly, this flexible inflation targeting has not disappointed even during 2022, when prices of food and fuel skyrocketed 🔥.

After the massive 50 bps cut initiated by the RBI in June, this move would seem reckless ⚠️.

The headline CPI fell to 2.82% in May 📊, the lowest since early 2019, with FY26 projected at 3.7%. This opens room for possibly one more modest cut this year ✂️, assuming growth remains weak 📉.

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Thus, the RBI’s decision to stick with the 4% target reflects a deliberate strategy of policy stability ✅, particularly when inflation is well within the desired range 🎯.

RBI’s Framework Review Panel and the Food Price Debate 🍲

• The Monetary Policy Framework Review Panel 🏛️, a body set up to evaluate the inflation-targeting mechanism, is the RBI’s fulcrum in shaping the strategy. One of the recurring themes discussed within the panel has been the treatment of volatile food items 🥦🍅 in the CPI basket.
  
  In 2024 📅, Chief Economic Adviser (CEA) V. Anantha Nageswaran floated the idea of excluding highly volatile food prices, such as vegetables 🥕, pulses 🌾, and fruits 🍎, from the CPI for policy-setting purposes.
  
  The logic 💡: food prices often spike or dip due to seasonal 🌦️ or weather-related factors and do not always reflect underlying inflationary trends 📈.
  
  However, no action was taken on this suggestion, likely because:

• Food forms a significant part of the Indian consumption basket 🛒 and is important to households 👨‍👩‍👧‍👦.

• Excluding it might create a disconnect ❌ between lived experiences and the official inflation rate 📉.
   
• Globally 🌎, most central banks include food and fuel in their headline inflation measures, even if core inflation receives policy attention 🎯.

The review panel, while acknowledging the volatility ⚖️, is expected to reiterate the importance of retaining food items in the CPI ✅ to ensure comprehensiveness and transparency 🔍.

Is the RBI Waiting to Assess June’s 50 bps Rate Cut Before Moving on Inflation Target? 🤔 

The RBI executed a 50-basis-point rate cut ✂️ in June 2025, the first such move in over a year 🗓️, aimed at supporting consumption 🛍️ and boosting private investment 📈. Market watchers 👀 believe the central bank is in wait-and-watch mode ⏳, assessing the transmission of this rate cut across lending rates 💰, credit offtake 🏦, and inflation expectations 📊.

Adjusting the inflation target in such an environment would be premature ⚠️. The RBI likely wants to observe:

✅ Whether the rate cut stimulates demand without stoking inflation 🔥.

✅ How the monsoon season 🌧️ affects food prices 🍚 and rural consumption 🏡. This may go south if the green belt 🌾 in the north observes a weak monsoon 🌦️.

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✅ If global oil prices 🛢️ remain benign, keeping input costs low 📉.

Conclusion ✅

Despite headline inflation dropping to multi-year lows 📉, the RBI is unlikely to tweak its 4% target just yet. The central bank and its advisory panel appear aligned 🤝 in their view that policy credibility 🏛️, inflation anchoring ⚓, and long-term stability 🛡️ outweigh the need to react to short-term trends 🌊.

As the March 2026 review approaches 📅, discussions about recalibrating India’s inflation-targeting framework may intensify 💬. But for now, expect continuity 🔁, not change—a message markets are happy to receive 📈.