RBI to Retain 4% Inflation Target, Bolstering Market Stability

The Reserve Bank of India (RBI) is poised to retain its 4% inflation target, as indicated by an internal committee's proposal to the Finance Ministry. This target, which falls within a 2%-6% corridor, is set to be renewed next year. The draft proposal, expected to be handed to Governor Sanjay Malhotra by September, allows six months for government approval before the March 2026 expiry. Since its adoption in 2016, the flexible inflation targeting framework has effectively managed price shocks, including the 2022 food-and-fuel surge, where it missed the band only once for three consecutive quarters. Committee members argue that any changes now could unsettle bond investors who are already adjusting to a new governor and a refreshed Monetary Policy Committee.

There has been debate within the government about the inclusion of volatile food items, which make up 46% of India’s Consumer Price Index (CPI) basket. Some officials have advocated for a core-only measure, but the panel insists that households feel the impact of food costs first, and excluding them would erode public trust. Chief Economic Adviser V. Anantha Nageswaran proposed this exclusion last year, but former Governor Shaktikanta Das quickly dismissed the idea, and Malhotra’s team now seems ready to finalize the decision to keep food items in the CPI calculation.

On June 6, the RBI implemented a significant easing measure with a 50-basis-point repo cut to 5.50% and a 100-basis-point cash-reserve-ratio trim, shifting its stance to “neutral.” The central bank cited subdued inflation as the reason for having “limited policy space” for growth support. By maintaining the 4% target, policymakers can justify the June move as disciplined rather than impulsive. This strategy provides clarity and stability, which is crucial for both conventional investors and the growing crypto market in India.

Headline CPI cooled to 2.82% in May, its lowest level since early 2019, allowing the RBI to project fiscal-year-2026 inflation at 3.7%. Sub-4% readings give the Monetary Policy Committee (MPC) room for one modest additional cut later this year if growth stalls, according to analysts. Benchmark 10-year bond yields slipped six basis points to 6.78% on the draft news, reversing part of the 10-basis-point jump that followed June’s jumbo cut. The rupee edged past 84 per dollar as traders marked down near-term carry, prompting the central bank to enter the swap market to smooth moves.

Policy predictability is essential for liquidity, as cheaper rupee funding historically widens on-exchange order books and boosts derivative open interest. A weaker rupee often nudges savers toward dollar-backed stablecoins. Low inflation provides regulatory headroom that could accelerate the long-awaited Digital Asset Bill. For global funds eyeing India’s Web3 scene, a locked-in 4% target signals that macro surprises are less likely to derail capital deployment.

However, there are risk factors to monitor. Food-price shocks from a poor monsoon or an oil spike above $80 could drive CPI back toward the 6% ceiling, forcing a policy rethink. A hawkish Federal Reserve could also pressure the rupee, limiting the RBI’s scope to ease further. Any deviation from headline CPI as the benchmark would reopen ideological battles inside the Finance Ministry and unsettle investors. A recommendation to keep the 4% inflation anchor isn’t just technocratic housekeeping; it’s a confidence play. By reaffirming a rule that markets understand, the RBI shores up credibility after its bold June cut and lays steadier ground for both conventional investors and India’s booming crypto class to plan their next moves.