"India's July retail inflation hits 19-month high amid food and import pressures"
Flexible Inflation Targeting (FIT)
RBI framework targeting 4% CPI with a ±2% tolerance band, established under the RBI Act, 1934.
Core inflation
CPI excluding food and fuel; measures underlying demand-side price pressures, stripping out volatile supply-shock components.
India's Flexible Inflation Targeting (FIT) framework was established through an amendment to the Reserve Bank of India Act, 1934 in 2016, replacing the earlier multiple-indicator approach that lacked a clear nominal anchor. Under FIT, the central government, in consultation with the RBI, sets a medium-term CPI inflation target of 4%, with a tolerance band of ±2 percentage points (i.e., 2%–6%). The framework aligns India with international best practices in central banking by tying the RBI's mandate to a measurable price-stability goal.
A binding accountability mechanism underpins the framework: if inflation remains outside the 2–6% band for three consecutive quarters, the RBI must submit a formal report to the government explaining the failure and proposing remedial measures. The Monetary Policy Committee (MPC) — a six-member body comprising three RBI representatives (including the Governor, who chairs and holds a casting vote) and three external members appointed by the central government — is the institutional vehicle for achieving the target, primarily through adjustments to the policy repo rate. India's CPI basket assigns roughly 46% weight to food and beverages, making food-price dynamics disproportionately influential on headline inflation. Core inflation — CPI excluding food and fuel — is tracked as a proxy for underlying demand-side pressures.
Inflation in India is measured through two principal indices: the Consumer Price Index (CPI), which captures retail prices and serves as the FIT anchor, and the Wholesale Price Index (WPI), which tracks producer/wholesale-level prices. The gap between WPI and CPI movements reveals the degree of pass-through from upstream cost pressures to retail consumers — a critical analytical lens for understanding whether inflation is demand-driven or cost-push in nature.
Supply-side (cost-push) inflation arises from shocks to input costs — energy prices, freight rates, agricultural supply disruptions — rather than from excess demand. India is structurally exposed to this type of inflation because it imports roughly 85–90% of its crude oil requirements, making domestic fuel and transport prices sensitive to global crude price movements and rupee depreciation. …
With reference to Indian economy, demand-pull inflation can be caused/increased by which of the following?
1.Expansionary policies
2.Fiscal stimulus
3.Inflation-indexing wages
4.Higher purchasing power
5.Rising interest rate
Select the correct answer using the code given below.
Which one of the following is likely to be the most inflationary in its effects?
If the interest rate is decreased in an economy, it will
Consider the following statements regarding India's Flexible Inflation Targeting (FIT) framework:
1.The FIT target is 4% CPI inflation with a tolerance band of ±2 percentage points.
2.If inflation remains outside the tolerance band for two consecutive quarters, the RBI must submit a formal report to the government.
3.The Monetary Policy Committee comprises six members, with the RBI Governor holding a casting vote.
Which of the statements given above is/are correct?
Which of the following best explains why the RBI's repo rate is considered a limited instrument against the type of inflation India experienced in July, as described in recent data?
With reference to the Consumer Price Index (CPI) in India, which of the following statements is correct?
Consider the following factors:
1.Rupee depreciation against the US dollar
2.Disruption to crude oil export routes from a major supplier country
3.A rise in the RBI's Cash Reserve Ratio
4.Elevated freight and transport costs
Which of the above are channels through which 'imported inflation' can transmit to India's retail prices?
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