Flexible Inflation Targeting (FIT) Framework, Background, Significance

The Government of India has retained the flexible inflation targeting (FIT) framework, keeping the retail inflation target at 4%, with an upper tolerance of 6% and a lower tolerance of 2%, for another five years, from April 1, 2026, to March 31, 2031. This decision follows the second five-year review of the framework, held in the national capital in March 2026, reflecting the government’s commitment to price stability amid global uncertainties.

Flexible Inflation Targeting (FIT) Framework Background

The flexible inflation targeting framework was introduced in May 2016 through an amendment to Section 45ZA of the Reserve Bank of India (RBI) Act, 1934, empowering the central bank to maintain inflation within a specified target range. The framework is anchored on the following principles:

• Inflation is measured through the Consumer Price Index (CPI).
• The Monetary Policy Committee (MPC) of the RBI is mandated to ensure CPI inflation remains at 4% ± 2%.
• The Monetary Policy Committee has six-members –  three from RBI (including the RBI Governor) and 3 appointed by the Government of India. All the members have one vote and in the event of equality of votes, the Governor gets a second or casting vote.
• The government and RBI are required to review the FIT framework every five years, with the first review conducted in March 2021.
• The RBI shall be seen to have failed to meet the Target if inflation is more than 6% or less than 2% for three consecutive quarters. 
• In case RBI fails to meet the target, it will have to give a written report to Government of India explaining the reasons of failure, remedial actions to be taken and an estimated time period within which the Target would be achieved

Flexible Inflation Targeting (FIT) Framework Performance

An analysis by the RBI shows that the flexible inflation-targeting framework has helped reduce inflation significantly:

• Average Consumer Price Index (CPI) inflation declined from 6.8% (2012-16) to 4.9% in the years following the adoption of the framework.
• Between 2016 and 2021, retail inflation remained within the target band of 2-6% for roughly three-fourths of the time, and for about two-thirds of the time thereafter.

In February 2026, CPI inflation reached 3.21%, up from 2.74% in the previous month, remaining well within the targeted range, reflecting the effectiveness of the framework in maintaining moderate inflation. 

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Flexible Inflation Targeting (FIT) Framework Significance

The flexible inflation targeting framework plays a critical role in India’s macroeconomic policy:

• Price Stability: Ensures inflation remains within a predictable range, protecting the purchasing power of citizens.
• Policy Coordination: Encourages alignment between monetary policy (RBI) and fiscal policy (government) to maintain overall economic stability.
• Accountability: The RBI is answerable to Parliament if targets are missed, enhancing transparency and credibility.
• Flexibility: The “flexible” nature allows the RBI to respond to supply shocks, global disruptions, and unforeseen economic risks without abandoning the price stability objective.