Govt sets 5-year inflation target in consultation with RBI

The central government on Wednesday notified an inflation target for the five-year period from FY27 to FY31. The target -- 4.0 per cent with a tolerance band of 2.0 per cent in each direction -- was decided in consultation with the RBI, the Department of Economic Affairs under the Ministry of Finance said.

The action was undertaken under Section 45ZA of the RBI Act, 1934, said the department.

What is the government's inflation target for five years starting April 1?

• Inflation target: 4.0 per cent
• Target with upper tolerance limit: 6.0 per cent
• Target with lower tolerance limit: 2.0 per cent.

The five-year framework affirms the country's flexible inflation targeting regime.

No change in five-year inflation goal

The latest five-year inflation target marks status quo compared to the goal for the previous five-year period, which ends as the current financial year (FY26) concludes on March 31.

The central government sets this target every five years. Finance Ministry officials consult the central bank to arrive at this goal.

The target is the same as the RBI's medium-term consumer inflation goal.

The central bank has been working to contain inflation at 4.0 per cent with a tolerance band of 200 basis points on each side.

The latest official notification anchors the RBI governor-led Monetary Policy Committee’s legal monetary policy mandate.

Under this framework, if inflation breaches the target for three consecutive quarters, the RBI is required to explain the reasons for the failure.

The RBI primarily uses Consumer Price Index (CPI) inflation data -- also known as headline inflation data -- to assess the retail inflation situation in the country.

Tracking inflation closely enables central bankers to strike the intended balance between economic growth and the flow and availability of money.

Where does inflation stand?

Official data released earlier this month shows that CPI inflation -- or the rate of increase in the retail prices of select goods and services in the economy -- stood at a 10-month high of 3.2 per cent in February.

Many economists have warned that non-subsidised LPG rate increases along with rising precious metal prices may worsen the inflation situation further in the next month.

Consumer inflation data is broadly categorised into 12 categories of items, capturing average household spending.

In the February data set, the five items that registered the maximum levels of inflation were: Silver jewellery, gold/diamond/platinum jewellery, copra, tomato and cauliflower.

Also, five states that recorded the maximum inflation were: Telangana, Rajasthan, West Bengal, Kerala and Andhra Pradesh.