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Reserve Bank of India and Inflation targeting

Posted on : 20 Dec 2019

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  • With the adoption of inflation targeting, RBI changed its nominal anchor to Consumer Price Index (CPI)-based inflation.
  • This change made sense because services constitute a big component of demand, and was not captured by WPI.
  • Recently, WPI is witnessing a persistent downward trend. Manufactured products inflation have become negative, and slipped into deflation.
  • The reason behind WPI collapse is fall in global commodity prices (mostly basic metals prices).
  • WPI captures the pricing power of manufacturers. A prolonged period of low WPI indicates erosion in pricing power of manufacturers/Indian companies.
  • A sharp fall in WPI indicates that the demand slowdown is pervasive in all parts of the economy.
  • WPI can be used in assessing economic growth, since it captures the imported inflation/ disinflation.

Article Related Questions

  1. In 2014 RBI changed the nominal anchor for monetary policy from Wholesale Price Index (WPI) to Consumer Price Index (CPI). How is WPI still relevant to Indian economy?
    1.WPI better captures imported inflation
    2.WPI can help determine the depth of demand slowdown in economy
    3.WPI captures the trend in services sector
    Choose the correct answer:

  2. 1.1 only

    2.1 and 2 only

    3.2 only

    4.2 and 3 only

    Right Ans : 1 and 2 only

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