Context: The government has kept the inflation-targeting framework for the central bank unchanged for the five-year period beginning 1 April, ending speculation that a more relaxed inflation goal may be adopted to boost growth.
Key Points

• The Centre will retain the inflation target of 4%, with a tolerance band of +/- 2 percentage points.
• This target will be applicable for the period April 1, 2021, to March 31, 2026.
• Recent high inflation together with low economic growth ignited the debate on the relevance of Inflation targetting.
• However, as per 14th Finance Commission member M. Govinda Rao, the range of 2%-6% as a flexible inflation target has worked reasonably well.

Inflation Targetting 

• Inflation targeting refers to keeping the inflation rate within the permissible band to ensure the certainty for carrying out investment activities.
• The agreement between the Reserve Bank of India (RBI) and the central government signed in February 2015. The agreement explicitly made inflation targeting the objective of the MPC while using the repo rate as the instrument for it.
• The Reserve Bank’s MPC was given the target of keeping inflation at 4% with a tolerance limit of 2%. This meant that inflation should be between 2% and 6%.

About MPC (Monetary Policy Committee)

• The Monetary Policy Committee (MPC) is a committee of the Central Bank of India (Reserve Bank of India). It is headed by RBI Governor.
• The Reserve Bank of India Act, 1934 (RBI Act) was amended by the Finance Act, 2016.
• It provided for a statutory and institutionalized framework for a Monetary Policy Committee. MPC maintains price stability while keeping in mind the objective of growth.
• The function of MPC is to fix the benchmark policy interest rate (repo rate) to contain inflation within the specified target level i.e. inflation targeting.