Indian Economy: Inflation & Monetary Policy

Inflation refers to the sustained increase in the general price level of goods and services. In India, the Reserve Bank of India (RBI) manages inflation primarily through its Monetary Policy.

Measuring Inflation

• CPI (Consumer Price Index): Measures price changes from the perspective of the retail buyer. It is the primary tool used by the RBI for inflation targeting.
• WPI (Wholesale Price Index): Measures price changes at the level of the producer or wholesaler. It does not include services.
• Headline vs. Core Inflation: Headline inflation includes all items (including volatile food/fuel), while Core inflation excludes volatile components.

The Monetary Policy Committee (MPC)

• Structure: A 6-member committee (3 from RBI, 3 appointed by GoI) that meets at least 4 times a year.
• Repo Rate: The rate at which the RBI lends money to commercial banks. Increasing it helps control inflation.
• Reverse Repo Rate: The rate at which RBI borrows money from banks to suck out excess liquidity.
• CRR & SLR: Reserve requirements that banks must maintain, affecting their ability to lend.

Question for you: What is the current “Inflation Target” range (in percentage) mandated for the RBI under the Flexible Inflation Targeting framework?

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