"Rising CPI and Crude Prices Strengthen Case for RBI Rate Hike"
Repo Rate
the rate at which the RBI lends overnight funds to commercial banks.
CPI (Consumer Price Index)
measures retail prices paid by households; India's official inflation anchor for monetary policy.
India's monetary policy framework rests on inflation targeting, formally adopted under the Reserve Bank of India (Monetary Policy Framework) Agreement and codified in the RBI Act, 1934 (as amended in 2016). The Monetary Policy Committee (MPC) is the statutory body responsible for setting the policy repo rate, the rate at which the RBI lends overnight funds to commercial banks. The MPC has six members: three from the RBI (including the Governor, who chairs it) and three external members appointed by the government. Decisions require a majority vote, with the Governor holding a casting vote in case of a tie.
The MPC's primary mandate is to maintain CPI inflation at 4 per cent, with a tolerance band of ±2 per cent (i.e., a floor of 2 per cent and an upper ceiling of 6 per cent). If inflation breaches the upper limit of 6 per cent for three consecutive quarters, the MPC must submit a written report to the government explaining the failure and the remedial path. This accountability mechanism is central to the framework's credibility.
Two key price indices measure inflation in India. The Consumer Price Index (CPI) measures retail prices paid by households. It has a higher weightage for food items (roughly 45 per cent of the basket) than the Wholesale Price Index (WPI), which measures prices at the producer/wholesale level. Critically, WPI does not capture changes in prices of services, whereas CPI does. Because CPI better reflects the cost of living for ordinary households, the RBI uses CPI, not WPI, as its key measure of inflation for monetary policy decisions. When money demand rises while money supply stays constant, interest rates rise, as lenders can charge more for scarce funds. This basic relationship explains why broad-based price pressures, signalling excess demand, push the MPC toward tightening.
The RBI's toolkit includes several instruments. Cutting the repo rate or the bank rate is expansionary: it lowers borrowing costs and stimulates spending. Cutting the Statutory Liquidity Ratio (SLR) is also expansionary, as it frees up more funds for banks to lend. By contrast, raising the Marginal Standing Facility (MSF) rate is contractionary: it makes emergency overnight borrowing more expensive for banks, tightening liquidity. A rise in the bank rate generally signals that the central bank is following a tight money policy, signalling to markets that credit will become costlier. The RBI also conducts open market operations (OMOs), selling government securities to absorb excess liquidity from the system.
Inflation can be broadly classified as demand-pull or cost-push. Demand-pull inflation arises when aggregate demand outpaces supply, driven by expansionary fiscal or monetary policies, fiscal stimulus, inflation-indexed wages, or higher purchasing power. Cost-push inflation arises from supply-side shocks: rising input costs (fuel, raw materials) that push up production costs and, ultimately, consumer prices. In practice, both forces can operate simultaneously, producing broad-based inflation that is harder to control than a single-source price spike.
The real interest rate is the nominal interest rate minus the expected inflation rate. When inflation rises faster than the policy rate, the real interest rate turns negative. A negative real rate means borrowers are effectively being subsidised, which stimulates further spending and can entrench inflation. …
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1.Cut and optimize the Statutory Liquidity Ratio
2.Increase the Marginal Standing Facility Rate
3.Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
Consider the following statements:
1.The weightage of food in Consumer Price Index (CPI) is higher than that in Wholesale Price Index (WPI).
2.The WPI does not capture changes in the prices of services, which CPI does.
3.Reserve Bank of India has now adopted WPI as its key measure of inflation and to decide on changing the key policy rates.
Which of the statements given above is/are correct?
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.
An increase in the Bank Rate generally indicates that the
Consider the following statements regarding India's inflation targeting framework:
1.The Monetary Policy Committee (MPC) consists of six members, of whom three are appointed by the Union government.
2.The Consumer Price Index (CPI) assigns a higher weightage to food items than the Wholesale Price Index (WPI) does.
3.If CPI inflation breaches the upper tolerance limit for two consecutive quarters, the MPC must submit a written report to the government.
4.The WPI captures changes in prices of services, whereas the CPI does not.
How many of the above statements are correct?
Which of the following actions by the Reserve Bank of India would be consistent with an expansionist monetary policy?
1.Cutting the Statutory Liquidity Ratio (SLR)
2.Increasing the Marginal Standing Facility (MSF) rate
3.Cutting the Bank Rate
4.Conducting open market operations by selling government securities
Select the correct answer using the code given below:
With reference to India's Consumer Price Index (CPI) and Wholesale Price Index (WPI), consider the following pairs:
Feature — Index in which it applies
1.Higher weightage for food items — CPI
2.Captures changes in prices of services — WPI
3.Used by RBI as key inflation benchmark — CPI
4.Measures prices at the retail level — WPI
How many of the above pairs are correctly matched?
With reference to demand-pull inflation in the Indian economy, which of the following can cause or increase it?
1.Expansionary monetary policy
2.Fiscal stimulus by the government
3.Inflation-indexing of wages
4.Rising interest rates
Select the correct answer using the code given below:
Assertion (A): When money demand increases while money supply remains constant, the rate of interest rises.
Reason (R): Higher interest rates reduce the attractiveness of borrowing, thereby cooling aggregate demand and inflationary pressures.
Which of the following is correct?
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