FIT is fit for purpose, sure, but India has missed a chance to refine its inflation targeting regime

Hence this status quo on the overall framework, including the four issues raised by the Reserve Bank of India (RBI) in its August 2025 discussion paper. Monetary policy will continue to target headline inflation, as mandated under the FIT regime adopted in 2016, not core inflation (which strips out volatile items like food and fuel).

This is a wise call, since food accounts for a significant share of India’s consumption basket, although its weight was reduced by the recast retail price index that RBI must watch. Similarly, there is no change in the inflation target of 4%. The tolerance band will also be retained at 2% to 6%.

At one level, it would seem that the government has, in the words of RBI’s paper, missed “an opportunity to revisit some of the basic tenets of the framework to nudge the economy towards further improved macroeconomic outcomes in the best interest of all stakeholders.”

But given the central bank’s no-change preference and the FIT regime’s satisfactory track record, it is hard to quarrel with that decision. ‘If it ain’t broke, don’t fix it’ seems to be the underlying rationale.

As RBI’s deputy governor in charge of monetary policy and Barry Eichengreen, professor of economics at the University of California, Berkeley, observe in their August 2024 paper reviewing India’s FIT, “Radical changes such as broadening the RBI’s monetary mandate, abandoning the target in favour of a more discretionary regime, targeting core instead of headline inflation, or altering the target and tolerance band would be risky and counterproductive.”

However, the regime’s renewal leaves us with a niggling sense of disappointment that the government did not use the second FIT review (the first was in 2021) to make some procedural changes that would have increased transparency without risking damage to a tried-and-tested formula.

For instance, RBI’s suggestion (at the time of the 2021 review) to onboard external members of the monetary policy committee (MPC) in a staggered manner could have been put into play.

Likewise, the risk of any contradiction between the MPC’s rate decisions and RBI’s liquidity management could have been resolved by formalizing the need to keep open market operations in harmony with the FIT. This is important, as there have been occasions when the MPC raised interest rates only to have RBI ease liquidity by buying bonds, negating the impact of the rate action on credit conditions.

Moreover, the clause asking RBI to submit a report to the government if the FIT cap is breached for three consecutive quarters could have been modified. Under the framework as it stands, the central bank is not required to make this communication public. When the 6% ceiling was overshot for five quarters in a row from the fourth quarter of 2021-22 to the same quarter of 2022-23, the public was kept in the dark.

In keeping with the zeitgeist of our times—greater openness in matters of public policy—the latest FIT review could have amended this clause to make such a report’s disclosure mandatory.

Admittedly, the system is not broke; it has worked well. But a few tweaks would have gone a long way to improve it.