"Retail Inflation Spreads Across Items, Pressuring RBI on Rates"
Inflation generalisation
price increases spreading across most items in the consumption basket, not just food or fuel
Diffusion index
a weighted measure of how many CPI items show inflation above a chosen threshold
India's monetary policy works under a formal inflation-targeting framework. A 2016 amendment to the Reserve Bank of India Act, 1934 set this up. The Monetary Policy Committee (MPC) has six members. Three come from the RBI and three are outside members. The MPC sets the policy repo rate. This is the rate at which the RBI lends short-term funds to banks. The MPC's job is to keep Consumer Price Index (CPI, meaning: the index tracking prices paid by households for a basket of goods and services) inflation at 4%. The target sits within a band of 2% to 6%. The MPC must explain to the government in writing if inflation breaches the band for three consecutive quarters. This rule keeps the framework accountable.
Comparing price indices matters for understanding this policy choice. Food carries a much heavier weight in the CPI than in the WPI. WPI means Wholesale Price Index. The WPI barely covers services at all. This is why the RBI tracks CPI, not WPI, as its key policy anchor. CPI better reflects what rising food prices actually cost an ordinary household. Inflation itself can come from demand-pull or supply-side (cost-push) pressures. Demand-pull inflation follows from expansionary fiscal policy, tax cuts, wage increases, or any rise in people's spending power. Supply-side inflation follows from rising input costs. These include costlier crude oil, a weaker rupee raising import costs, or crop damage from bad weather. A simple money-market logic explains why the repo rate works on demand-pull pressure. When money demand rises while supply stays fixed, the equilibrium interest rate rises to clear the market. A repo rate hike does the same job. It makes credit costlier and cools spending. This same tool has far less reach over supply shocks like a bad harvest or an oil price spike.
The RBI adopted CPI as its key inflation measure in 2016. It replaced WPI. CPI better reflects household purchasing power and includes services. Demand-pull inflation occurs when aggregate demand exceeds aggregate supply. Supply-side (cost-push) inflation arises from rising input costs independent of demand.
Inflation generalisation means price increases spread from food and fuel to a wider range of goods and services. They stop staying confined to a few volatile items. One simple check counts how many of the CPI's 358 items show inflation above 4%. This is the RBI's target. This count nearly doubled between January and September. A second check tracks month-on-month price momentum rather than year-on-year inflation. A high or low base from the previous year can distort the annual figure. By September, the number of items whose prices had risen compared to the month before had also climbed sharply.
A more rigorous tool is the diffusion index. A diffusion index weights each CPI item by its share in the basket to measure how broadly inflation is spreading. …
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
Supply of money remaining the same when there is an increase in demand for money, there will be
With reference to the Monetary Policy Committee (MPC), consider the following statements:
1.The MPC has six members, three from the RBI and three external members appointed by the Government.
2.The RBI Governor chairs the MPC and holds a casting vote in case of a tie.
3.If inflation breaches its target band for three consecutive quarters, the RBI must explain this to the Supreme Court in writing.
Which of the statements given above is/are correct?
Which of the following factors is/are properly classified as causes of demand-pull inflation rather than supply-side (cost-push) inflation?
1.Expansionary fiscal policy and tax cuts
2.A rise in global crude oil prices
3.Wage growth that raises purchasing power
4.Currency depreciation raising import costs
Select the correct answer using the code given below.
Consider the following statements regarding India's Consumer Price Index (CPI):
1.The CPI basket consists of 358 items.
2.Item weights in the CPI are revised based on the Household Consumption Expenditure Survey.
3.The RBI's medium-term inflation target is 4%, within a tolerance band of 2% to 6%.
Which of the statements given above is/are correct?
Match List-I (Inflation indicator, September) with List-II (approximate value) and select the correct answer using the code given below:
List-I
A.Headline CPI inflation
B.Rural food inflation
C.Core inflation
D.Transport services (goods) inflation
List-II
1.14.73%
2.8.06%
3.5.54%
4.4.6%
If the supply of money remains unchanged while the demand for money rises, which of the following is the most likely consequence in the money market?
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