RBI is likely to retain the core components of the FIT framework, sources said

Economists favor continuity because the framework produces predictable monetary policy outcomes | Photo credit: REUTERS

Industry sources say the inflation tolerance band of 2 to 6 percent was already at a lower level when it was introduced in 2016 and could be revisited over the next five to 10 years as inflation forecasts continue to improve.

Policy clarity

Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said: “We recommend continuing with headline CPI inflation. Even though food inflation is supply-side driven, monetary policy cannot overlook this. There is a strong correlation between food prices and inflation expectations. An inflation target of 4 percent remains optimal, and the 2-6 percent inflation band should not be reduced.”

Lowering the target, says Sen Gupta, will make monetary policy unnecessarily restrictive, and raising the target will be seen as a reduction in focus on the inflation mandate. “Part of the reason for the success of the inflation target is the clarity of communication that a point target provides to the public, which is why we recommend retaining the point inflation target,” she said.

Sakshi Gupta, chief economist at HDFC Bank, said the headline target should be retained as it reflects a combination of food and core inflation impacts for consumers. For a majority of low- and middle-income households, expenditure on food accounts for a significant share and excluding that component could influence policy decisions. “With the introduction of the new inflation series in February, headline inflation will better reflect the price pressures facing households at an aggregate level,” she said.

Soumyajit Niyogi, director of India Ratings & Research, said continuing with the existing FIT is a logical choice as it has helped anchor inflation expectations, stabilize core inflation and push the policy rate trajectory towards the lower bound.

Focus on the headline

Madan Sabnavis, chief economist at Bank of Baroda, said the RBI should continue to focus on the headline inflation rate and not on a sub-component of it. “This is because central banks need to control overall inflation and not just some segments. This will otherwise give a distorted picture. Furthermore, in my opinion, the concept of core inflation is only for understanding inflation dynamics and should stop there…”

Sujit Kumar, chief economist at NABFID, said the current FIT has served India well, with inflation broadly conforming to the target range amid a decline in volatility from a historical perspective. Moreover, inflation expectations have remained largely anchored at the 4 percent target, with households responding to lower inflation in successive rounds of expectations surveys, helping to usher in a lower cost of capital in the economy.

Published on January 5, 2026