The Monetary Policy Committee operates under a flexible inflation-targeting framework anchored at 4% ± 2%. Critically analyse whether the MPC has the right toolkit to balance growth and price stability in 2026.

Introduction:

The Monetary Policy Committee, set up under Section 45ZB of the RBI Act 1934, has operated a flexible inflation-targeting framework anchored at CPI 4% (±2%) since 2016, last reviewed by the Government in March 2026. RBI's Annual Report 2024-25 notes headline CPI averaged 4.9% in 2024-25, with food inflation at 7.5% — well above core, exposing the limits of a demand-management toolkit in a supply-shock economy.

Tool adequacy: The MPC has used the repo rate, held at 5.75% since June 2025 (RBI Bulletin), the Liquidity Adjustment Facility corridor, Operation Twists and forex interventions. These instruments anchor inflation expectations and core inflation (4.1% in March 2026), but transmit weakly to CPI when food has 45.9% weight in the basket.

Supply-side episodes: The 2024 onion-tomato spike and edible-oil import bill (₹1.4 lakh crore) showed that rate hikes cannot offset perishables. The Urjit Patel Committee design presumed demand-pull inflation, requiring fiscal-monetary coordination via the Cabinet's Inter-Ministerial Group and the Department of Consumer Affairs' Price Stabilisation Fund.

Communication and credibility: Forward guidance has improved — the MPC publishes Resolutions, Minutes and a Monetary Policy Report. Yet the new 7.6% nominal growth glide-path (RBI MPR October 2025) and unconditional inflation-target letter to the Government remain untested in a high-tariff global environment.

Way forward:

The Department of Economic Affairs should pre-position buffer stocks in 12 high-inflation commodities under PSF before the next MPC review and consider a CPI-Core dual anchor by 2027 to insulate monetary policy from food shocks.