Securities Primary Dealership.
The RBI's current mixed mandate of managing inflation, economic growth and financial stability all in one gives it flexibility but has also led to often-shifting priorities. Critics say that has stifled growth - Asia's third-largest economy is expanding at its slowest pace in a decade - without bringing inflation under control.
"It's a big positive for India's macro policy framework if they can get this implemented, because it will basically help I think better anchor monetary policy by establishing a clear objective," said HSBC economist Leif Eskesen, echoing the sentiments of many economists.
The challenge is fitting rigid inflation management into an often-messy political reality.
Rajan's predecessor at the RBI, Duvvuri Subbarao, repeatedly called on New Delhi to implement reforms to ease investment rules, clear infrastructure bottlenecks and cut government subsidies, but with little success.
The new policy set-up would raise the stakes for the government to act - a tall order, especially if another fragmented coalition emerges from the upcoming elections.
Governments have tended towards promoting growth and putting pressure on the RBI to keep monetary policy loose. The Mumbai-based central bank is not technically independent - the governor and his deputies are appointed by the government - although it generally enjoys latitude in policymaking.
Setting a CPI target of 4 percent over the long-term would remove some of the discretion in policymaking and at the same time strengthen the central bank's independence by insulating it from pressures from New Delhi.