"August CPI Inflation Rises to Eight-Month High, MPC Rate Hike Expected"
Repo Rate
the rate at which the RBI lends overnight funds to commercial banks.
Consumer Price Index (CPI)
measures retail prices paid by households; used by RBI as its inflation benchmark.
India's monetary policy framework rests on inflation targeting, formally adopted under the Reserve Bank of India Act, 1934 as amended in 2016. The Monetary Policy Committee (MPC) is the statutory body responsible for setting the policy repo rate. It has six members: three from the RBI (including the Governor, who chairs it and holds a casting vote in case of a tie) and three external members appointed by the central government.
The MPC's primary mandate is to maintain CPI inflation at 4 per cent, with a tolerance band of ±2 per cent, a floor of 2 per cent and an upper ceiling of 6 per cent. If inflation breaches the upper limit 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.
The RBI uses the Consumer Price Index (CPI), not the Wholesale Price Index (WPI), as its key measure for monetary policy decisions. Two structural differences explain this choice. First, food items carry a higher weightage in CPI (roughly 45 per cent of the basket) than in WPI, making CPI a better proxy for household cost of living. Second, WPI does not capture changes in the prices of services, whereas CPI does. Because services are a large and growing share of household expenditure, CPI better reflects actual inflationary pressure on ordinary consumers. A rise in general prices can be caused by an increase in the money supply, a decrease in aggregate output, or an increase in effective demand, all three channels are relevant to understanding the current inflation episode. When money demand rises while supply stays constant, interest rates rise; this is precisely the mechanism the MPC exploits when it raises the repo rate to cool inflation. A repo rate hike also influences government bond yields, which respond to RBI actions, inflation expectations, and short-term interest rates simultaneously, meaning a rate hike tightens financial conditions across the economy, not just at the overnight lending window.
The repo rate is the rate at which the RBI lends overnight funds to commercial banks. When the MPC raises it, borrowing becomes more expensive for banks, which pass on higher costs to consumers and businesses through higher loan rates. This reduces credit demand, cools spending, and eventually brings inflation down. The transmission is not instant: it typically takes two to four quarters to fully work through the economy, which is why the MPC must act pre-emptively rather than waiting for inflation to visibly breach the ceiling.
The real interest rate is the nominal policy rate minus expected inflation. When the MPC holds the repo rate at 5.25 per cent while its own projections show CPI averaging 5.9 per cent in the October-December quarter, the forward-looking real interest rate is mildly negative. A negative real rate means money is effectively cheap even after accounting for inflation, an expansionary condition that does not restrain price pressures. …
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?
A rise in general level of prices may be caused by
1.an increase in the money supply
2.a decrease in the aggregate level of output
3.an increase in the effective demand
Select the correct answer using the codes given below.
Supply of money remaining the same when there is an increase in demand for money, there will be
Indian Government Bond Yields are influenced by which of the following?
1.Actions of the United States Federal Reserve
2.Actions of the Reserve Bank of India
3.Inflation and short-term interest rates
Select the correct answer using the code given below.
Consider the following statements regarding India's Consumer Price Index (CPI) and Wholesale Price Index (WPI):
1.The weightage of food items is higher in CPI than in WPI.
2.WPI captures changes in the prices of services, whereas CPI does not.
3.The Reserve Bank of India uses CPI, not WPI, as its key measure of inflation for monetary policy decisions.
Which of the statements given above is/are correct?
With reference to India's Monetary Policy Committee (MPC), consider the following statements:
1.The MPC has six members, of whom three are from the RBI and three are appointed by the central government.
2.The RBI Governor chairs the MPC and holds a casting vote in case of a tie.
3.If CPI inflation breaches the upper tolerance limit for two consecutive quarters, the MPC must submit a written report to the government.
How many of the above statements are correct?
Consider the following pairs:
Price Index — What it primarily measures
1.Consumer Price Index (CPI) — Retail prices paid by households, including services
2.Wholesale Price Index (WPI) — Prices at the producer/wholesale level, excluding services
3.Producer Price Index (PPI) — Factory-gate output prices before goods reach wholesalers
How many of the above pairs are correctly matched?
Consider the following statements regarding Indian Government Bond Yields:
1.Actions of the United States Federal Reserve can influence Indian Government Bond Yields.
2.Actions of the Reserve Bank of India influence Indian Government Bond Yields.
3.Inflation and short-term interest rates influence Indian Government Bond Yields.
Which of the statements given above is/are correct?
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