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7 September 2026

Inflation targeting policy framework in India

Inflation targeting is a core macroeconomic policy framework of the RBI, and a decade-long review of its efficacy is a high-probability topic for direct questions in the GS3 Indian Economy section.

1 min read Day 10 of 10 2 questions 2 prelims

Notes

  • India has completed a decade of inflation targeting (IT) as a formal RBI policy framework.
  • The IT framework mandates the RBI to contain inflation at 4% within a band of +/- 2 percentage points.
  • RBI manages inflation via two channels: controlling demand through the repo rate and anchoring public inflationary expectations.
  • The New Keynesian Phillips Curve (NKPC) posits a positive relationship between output (GDP) and inflation, assuming wages rise with output.
  • Inflation targeting relies on the assumption that managing expectations can lower inflation without sacrificing output.
  • Academic research suggests the Indian NKPC is flat, indicating no significant trade-off between output and inflation.
  • Approximately 92% of Indian workers lack bargaining power, meaning wages do not rise with output, challenging the NKPC premise.
  • Data shows Indian household inflation expectations consistently exceed RBI projections by an average of four percentage points.

Part of a longer story

This is day 10 of 10 in RBI foreign currency swap facility, which has been running since 14 July 2026. Reading it whole is usually worth more than reading today alone — the exam asks how something developed.

Questions

  1. Critically examine the theoretical underpinnings of the inflation targeting framework in India and the challenges in its implementation. 150 words
    Attempt this — 150 words in 8 min
    0 / 150 words 8:00
  2. The effectiveness of monetary policy in developing economies is often debated against the backdrop of structural rigidities. Discuss the relevance of the New Keynesian Phillips Curve in the Indian context and the limitations of demand-side management in controlling inflation. 250 words
    Attempt this — 250 words in 11 min
    0 / 250 words 11:00

Prelims

  1. Under the current inflation targeting framework, what is the target inflation rate set for the Reserve Bank of India?

  2. The 'New Keynesian Phillips Curve' primarily describes the relationship between which two economic variables?

Syllabus

Topics

Sources

250words.in · https://250words.in/daily/2026-09-07/inflation-targeting-policy-framework-in-india