{"id":83948,"date":"2026-09-07T18:26:39","date_gmt":"2026-09-07T12:56:39","guid":{"rendered":"https:\/\/www.nextias.com\/ca\/?p=83948"},"modified":"2026-09-07T18:27:17","modified_gmt":"2026-09-07T12:57:17","slug":"india-inflation-targeting","status":"publish","type":"post","link":"https:\/\/www.nextias.com\/ca\/current-affairs\/07-09-2026\/india-inflation-targeting","title":{"rendered":"10 Years of India\u2019s Inflation Targeting Framework"},"content":{"rendered":"\n<p><strong>Syllabus: GS3\/ Economy<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Context<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India has completed a decade of inflation targeting (IT) as a formal policy framework of the Reserve Bank of India (RBI).\u00a0<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>India\u2019s Inflation Targeting Framework<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>India adopted a Flexible Inflation Targeting Framework (FITF) in <strong>2016 on <\/strong>recommendation by an Expert Committee<strong> headed by Dr. Urjit Patel.<\/strong>\u00a0<\/li>\n\n\n\n<li>As per<strong> Section 45ZA of the RBI Act, 1934<\/strong>, the Central Government, in consultation with the RBI, determines the inflation target once every five years.\n<ul class=\"wp-block-list\">\n<li>The<strong> Consumer Price Index (CPI)<\/strong> \u2014 which measures retail inflation \u2014 is the chosen benchmark.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>The Monetary Policy Committee (MPC)<\/strong> is mandated to maintain inflation as set by the Government.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Working of Inflation Targeting<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Demand channel: <\/strong>To lower consumption and investment demand and manage inflation, the RBI raises the repo rate to increase the borrowing cost.<\/li>\n\n\n\n<li><strong>Expectations channel:<\/strong> The RBI tries to anchor households\u2019 and firms\u2019 inflation expectations to its inflation target, so that expected inflation does not translate into increased salaries and prices.<\/li>\n\n\n\n<li>Both techniques rely heavily on the <strong>New Keynesian Phillips Curve (NKPC)<\/strong> which posits a positive link between output and inflation.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Concerns Regarding the Effectiveness of Inflation Targeting<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Flat Phillips Curve: <\/strong>Analysis of industrial output and CPI inflation for <strong>April 2012\u2013March 2026<\/strong> indicates that <strong>India&#8217;s Phillips Curve is largely flat.<\/strong>\n<ul class=\"wp-block-list\">\n<li>This suggests that changes in output and employment may have a limited effect on inflation.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Limited Wage Bargaining Power:<\/strong> A large proportion of India&#8217;s workforce is employed in the informal sector and has limited bargaining power.\n<ul class=\"wp-block-list\">\n<li>Hence higher output and employment may not necessarily lead to significant wage increases.<\/li>\n\n\n\n<li>The assumed <strong>wage-output-inflation mechanism<\/strong> underlying the Phillips Curve may therefore be weaker in India.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Unanchored Inflation Expectations: <\/strong>Household inflation expectations have regularly been beyond RBI&#8217;s inflation estimates. On average, the margin has been roughly four percentage points.<\/li>\n\n\n\n<li><strong>Supply-side nature of Indian inflation: <\/strong>Indian inflation is often supply-side driven due to food-price shocks, weather and climatic disasters, supply-chain disruptions; and global crude oil prices.\n<ul class=\"wp-block-list\">\n<li>Increases in interest rates have little direct power to deal with such supply side limitations.<\/li>\n<\/ul>\n<\/li>\n\n\n\n<li><strong>Risk to Growth: <\/strong>Higher interest rates could dampen private investment and household borrowing, posing a risk to growth.\n<ul class=\"wp-block-list\">\n<li>If inflation is unresponsive due to a flat Phillips Curve or supply side shocks, then monetary tightening may be costly in terms of lower output and employment.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large is-resized\"><img data-dominant-color=\"e4f0f5\" data-has-transparency=\"false\" loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"538\" src=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-55-1024x538.png\" alt=\"\" class=\"not-transparent wp-image-83949\" style=\"--dominant-color: #e4f0f5; aspect-ratio:1.9034131142897606;width:493px;height:auto\" srcset=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-55-1024x538.png 1024w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-55-300x158.png 300w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-55-768x403.png 768w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-55.png 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div>\n\n\n<p><\/p>\n\n\n\n<div class=\"wp-block-group has-background\" style=\"background-color:#ebecf0\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n<h3 class=\"wp-block-heading\"><strong>New Keynesian Phillips Curve (NKPC)<\/strong><\/h3>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The New Keynesian Phillips Curve (NKPC) explains the relationship between inflation, economic activity and inflation expectations.<\/li>\n\n\n\n<li>It states that current inflation is influenced by expected future inflation and the level of output or economic activity.<\/li>\n\n\n\n<li>When aggregate demand and output increase, employment and production costs may rise.\n<ul class=\"wp-block-list\">\n<li>Higher costs, particularly wages, are passed on to consumers through higher prices.<\/li>\n\n\n\n<li>Therefore, higher economic activity can lead to higher inflation.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"aligncenter size-large is-resized\"><img data-dominant-color=\"e4eff3\" data-has-transparency=\"false\" loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"515\" src=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-56-1024x515.png\" alt=\"NKPC\" class=\"not-transparent wp-image-83950\" style=\"--dominant-color: #e4eff3; aspect-ratio:1.986794522774369;width:485px;height:auto\" srcset=\"https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-56-1024x515.png 1024w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-56-300x151.png 300w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-56-768x387.png 768w, https:\/\/wp-images.nextias.com\/cdn-cgi\/image\/format=auto\/ca\/uploads\/2026\/09\/image-56.png 1200w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n<\/div><\/div><\/div>\n\n\n\n<p><\/p>\n\n\n\n<p><strong>Source: <\/strong><a href=\"https:\/\/www.thehindu.com\/business\/Economy\/does-inflation-targeting-work-in-india\/article71435164.ece\" target=\"_blank\" rel=\"noopener\"><strong>TH<\/strong><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p><strong> Context <\/strong><\/p>\n<li class=\"ms-5\"> India has completed a decade of inflation targeting (IT) as a formal policy framework of the Reserve Bank of India (RBI).\u00a0 <\/li>\n<p><\/p>\n<p><strong> India\u2019s Inflation Targeting Framework <\/strong><\/p>\n<li class=\"ms-5\"> India adopted a Flexible Inflation Targeting Framework (FITF) in 2016 on recommendation by an Expert Committee headed by Dr. Urjit Patel.\u00a0 <\/li>\n<li class=\"ms-5\"> As per Section 45ZA of the RBI Act, 1934, the Central Government, in consultation with the RBI, determines the inflation target once every five years. <\/li>\n<p><a href=\"https:\/\/www.nextias.com\/ca\/current-affairs\/07-09-2026\/india-inflation-targeting\" class=\"btn btn-primary btn-sm float-end\">Read More<\/a><\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-83948","post","type-post","status-publish","format-standard","hentry","category-current-affairs"],"acf":[],"jetpack_featured_media_url":"","_links":{"self":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/83948","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/comments?post=83948"}],"version-history":[{"count":3,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/83948\/revisions"}],"predecessor-version":[{"id":83953,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/posts\/83948\/revisions\/83953"}],"wp:attachment":[{"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/media?parent=83948"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/categories?post=83948"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.nextias.com\/ca\/wp-json\/wp\/v2\/tags?post=83948"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}