Copyright © HT Digital Streams Limit all rights reserved. Ajit Ranade 4 min Read 25 Aug 2025, 12:30 IST RBI now weighs the idea of switching to a nuclear inflation target. (Bloomberg) Summary A shift to core inflation target can injure the credibility of the Reserve Bank of India, weaken its communication, make expectations more difficult to influence and get in the way of a regime that works well. Do not fix that is not broken. The Reserve Bank of India (RBI) invited stakeholders’ comments on a discussion document on the next five -year review of its monetary policy framework. This framework, called India’s flexible inflation target (FIT) regime, was adopted in 2016. It was a landmark reform that determined price stability as the primary purpose of monetary policy. This was formalized by a contract signed between the government and the central bank, which set an inflation target of the consumer price index (CPI) of 4%, the center of a tolerance tape of 2-6%, and gave RBI a statutory mandate by changing the RBI law. This institutionalized transparency and accountability has aligned India’s approach with global best practices. It was reaffirmed in 2021. Also read: RBI at Fork in the Road, and experts are chasing the head inflation RBI is now weighing the idea of switching to a core inflation target. That would be a mistake. The current framework remains optimal for India in both international and domestic contexts. The first reason stems from the communication and credibility of the target. The head inflation, which includes prices of food and fuel, is much better and more tangible to the public. The direct impact of food and energy prices on daily expenses means that people associate ‘inflation’ with the heading measure, not the more technical core measure that excludes these volatile elements. CPI inflation is understood by people as a measure of their own cost of living. The acceptance of nuclear inflation if the target would be at risk, damaged the credibility of the regime and reduces the effectiveness of RBI’s communication. This would weaken the clarity of the messages. Even worse, households and businesses can consider RBI not responding to the inflation they face when food and fuel prices rise, but its core remains steady. They can consider RBI to ignore general hardships or move goalposts during price shocks. The confidence of the public depends on the policy aimed at the polite experience of inflation. If targets are transparent, related and consistently communicated, expectations are firmly anchored. Also read: Should the tariff setting panel track headline or nuclear inflation? RBI arouses debates about the second reason is related to international evidence. More than 36 countries practice inflation targets and almost everyone uses CPI of the head. No significant country of inflation target has completely abandoned this regime. Some supplemental inflation targets with other goals, but do not replace the CPI targets for the head. The use of CPI as the target increases transparency, ties in with public perceptions and supports clear communication. Core inflation is universally used for internal analysis and guidance, but not as an anchor. Any diversity of this practice could jeopardize the credibility of the RBI. A third reason is potential market confusion. Financial markets and analysts usually follow the CPI of the head. If RBI turns to core inflation, expectations and the signaling of future rate changes may become more complicated, possibly increasing the volatility or misinterpretation. The disconnection will make it more difficult for RBI to anchor inflation expectations. Also read: Mint Quick Edit | Inflation: Below the target, above the concern line, a fourth reason is the proposed change in the CPI construction. In early February, the CPI basket will be reviewed, reducing the weight of food items – more than half of the index – by up to 8 percentage points. This will make the CPI of the head less volatile and narrower underlying inflation trends, softening one of the most important arguments to switch to a core measure. Therefore, the perceived ‘problem’ of the regime is already addressed. A fifth reason is the principle of ‘if not broken, do not correct it. ‘The framework of India has delivered lower and more stable inflation since adoption; Inflation outcomes have improved against earlier decades of high volatility and persistent price increase. With the expected adjustment of the CPI basket, the weaknesses of the head inflation will reduce and not increase. Changing the anchor if the regime works well runs the risk of undermining confidence – a poor movement amid the current economic uncertainty. Also read: Himanshu: Low inflation masks A growing problem of fruitless farming The demand for shifting head to core inflation as a target stems from the volatility of food and fuel prices. For example, vegetable prices can jump up and down at double -digit rates in a short period, causing the head index to swing. It is seen that food prices in India are affected by supply shocks and considered immune to monetary policy. So some have argued that they removed it from the formal target. The economic survey 2023-24 also suggested that the nuclear inflation target be investigated to prevent monetary policy from being used to address the supply-induced food price spikes, which could lead to too much rise that harms the growth. But RBI itself has warned to ignore food prices, as persistent food inflation can waste wage and price expectations after core inflation. Monetary policy cannot reject the effects of the supply shocks of the second round. Sliding away from the head inflation, it can be considered politically as the monetary policy of the inflation experienced by the ordinary citizen, jeopardizing the credibility of RBI and trust in IT. In balance, India’s existing inflation targeting regime, head of the CPI as its anchor, will best serve our goals of growth, stability and credibility. The regime, which has been in place for almost ten years, is understood and respected internationally. It contains flexibility and will soon be structurally strengthened by the CPI review. To change this now – especially to target core inflation, which the public is not related to – would have confusion and risks without compensatory benefits. The author is a senior fellow at Pune International Center, captures all the business news, market news, news events and latest news updates on Live Mint. Download the Mint News app to get daily market updates. More Topics #rbi #Inflation Read Next Story
Ajit Ranade: RBI should not abandon the head inflation as its target
