India's RBI Commitment to 4% Inflation Target in 2025

The Reserve Bank of India (RBI) is conducting a major five-year review of its monetary policy framework. This led to the question: Should India continue to target 4% inflation or is it time to change the goal? Instead of a global debate about whether inflation targets should become more flexible, the RBI has clarified that it sees no need for a major shifting or changes.

What is Inflation Targeting?

Inflation targeting is a system where the central bank aims to keep price rise (inflation) around a fixed number. In India's case, 4% – by adjusting interest rates. RBI increases interest rates when inflation rises too high to cool down spending. When it falls too low, it cuts rates to boost demand. This approach keeps prices stable, helps businesses plan better and gives consumers confidence in the economy.

Why RBI is Sticking to 4%

RBI believes headline inflation including food and fuel is most relevant for ordinary households since these are major expenses. Sticking to this target helps people trust that prices will remain predictable.

The RBI argues that although food and fuel prices are volatile, they can affect other costs like wages and transport, so ignoring them would be risky.

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India's Inflation Record

Since adopting this framework in 2016, India's average inflation has dropped to 4.9%, compared to 6.8% before. This shows that the system has worked well, making inflation more stable and predictable. The RBI is also working on changing the CPI basket to consider trends, like telecom, digital payment & healthcare.

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The Road Ahead

As the RBI collects feedback on to keep the target same or make minor changes, it is clear that inflation targeting will hold out a key pillar of India's economic management. According to the RBI, a stable 4% target is the best way to balance price stability with growth.