The target and the band

Chapter 3 ended with a number nobody personally experiences. This chapter is about the people whose job is to move it anyway.

Why the target is not zero

The obvious target for inflation is zero, and no country aims there. Three reasons.

Measurement bias. Chapter 2's two biases — no substitution, incomplete quality adjustment — mean measured inflation runs slightly above true inflation. Aiming at a measured zero would mean aiming at a real negative.

Room to cut. A central bank fights a downturn by lowering interest rates. If inflation is near zero, rates are near zero, and there is nothing left to cut. A positive target keeps nominal rates high enough that they can fall when needed.

Falling prices are worse than slowly rising ones. If things will be cheaper next month, purchases get postponed, which reduces demand, which lowers prices further. Debts also get harder to repay in real terms, because the debt is fixed and incomes are falling. A small positive rate avoids that loop.

So the target is positive and modest, and in India it comes with a band.

Who sets it, and who hits it

A distinction that matters and is widely missed.

The target is set by the Central Government, in consultation with the Reserve Bank, under the Reserve Bank of India Act, and it is notified for a five-year period. It is a political decision made in public, not something the central bank chooses for itself.

Hitting it is the Reserve Bank's job, carried out by the Monetary Policy Committee — six members, three from the Reserve Bank including the Governor and three external members appointed by the Government. Each has one vote. The Governor has a casting vote if they tie.

That split is the design: elected government decides what price stability should mean, and an insulated committee decides how to get there. It keeps the hard decisions from being made by whoever faces an election soonest, without handing the objective itself to unelected officials.

The current framework targets 4% CPI inflation with a tolerance band of two percentage points either side, so 2% at the bottom and 6% at the top. The October 2026 minutes confirm the upper limit is live and operative: one member, Dr. Poonam Gupta, argues in her statement about "the upper tolerance limit of 6 per cent."

Because the target is notified for fixed periods, the exercise above asks you to find the current instrument rather than take the figures here on trust. That is the correct habit for anything with an expiry date on it.

What a band actually promises

The band is the most misunderstood part, so it is worth being exact.

It does not mean anything between 2% and 6% is fine. The target is 4%. The band is a tolerance for being away from it, not a range of acceptable outcomes. The October 2026 resolution says the committee "will endeavour to progressively align inflation with its target" — align with the target, not stay inside the band.

Breaching it has a defined consequence. If average inflation sits outside the band for three consecutive quarters, the Reserve Bank must report to the Government explaining why it failed, what it proposes to do, and how long it expects recovery to take. That report is the accountability mechanism, and its existence is why the band is not merely descriptive.

It exists because the central bank cannot hit a point. Policy acts with a lag of several quarters, and inflation gets moved by monsoons, oil prices and global shocks that no interest rate can reach. A point target with no tolerance would guarantee permanent failure and constant over-correction.

So the honest reading is: aim at 4%, expect to be off it, explain yourself if you are badly off it for long enough.

What they were looking at in October 2026

The committee met on 5th to 7th October 2026 and published its reasoning. The inflation projections from the Governor's statement of 7th October:

2026-27 CPI inflation, projected
Full year	5.2%
Q2	4.9%
Q3	6.0%
Q4	5.7%
Q1 of 2027-28	5.6%
Core inflation, full year	4.4%

Read the Q3 line. The committee was projecting inflation to reach 6.0% — exactly the upper tolerance limit — in the October to December quarter.

That is the context for everything in chapter 5. A committee whose target is 4%, whose tolerance ends at 6%, forecasting that it will touch 6%, is a committee that is about to act.

Note also the core projection of 4.4% against a headline of 5.2%. Core strips out food and fuel — the volatile parts chapter 3 showed running the monthly prints — and it was running well below the headline. The committee was therefore looking at a headline driven substantially by things interest rates cannot influence, which is the hardest situation this framework produces and the subject of chapter 5's last section.

The thing that makes this unusual

The minutes are published, with each member's individual statement, two weeks after the meeting.

So you can read not only what was decided but who argued what, in their own words, including disagreement with the majority. The October 2026 decision was unanimous — all six voted to raise the rate — and the statements still contain materially different reasoning about why and what should come next.

Very few institutions that affect your money publish their internal argument. This one does, free, on a fixed schedule. The exercise above asks you to read a set, because the difference between the resolution and the individual statements is the most information-dense twenty minutes available on the Indian economy.

The point

India targets 4% CPI inflation with a tolerance band from 2% to 6%, set by the Government under the RBI Act for five-year periods, and pursued by a six-member Monetary Policy Committee that votes and publishes its minutes. The band is a tolerance for missing the target, not a range of acceptable outcomes, and a sustained breach triggers a written explanation to the Government. In October 2026 the committee was projecting inflation to touch the 6% upper limit in the December quarter, which is why chapter 5 happens.