RAS question
Which price index is used by MPC for inflation targeting in India?
Correct answer: (B) Consumer Price Index — Combined (CPI-C).
India's Monetary Policy Committee uses the Consumer Price Index-Combined, not WPI, as the benchmark for inflation targeting.
Explanation
The MPC's inflation-targeting benchmark is Consumer Price Index-Combined (CPI-C), the CPI measure used for headline retail inflation. CPI-C is published by the National Statistical Office and captures the retail inflation experienced by consumers. The RBI source supports this framework: India's flexible inflation targeting regime was formalised through amendments to the RBI Act, the inflation target is set in terms of CPI, and the MPC determines the policy rate needed to achieve that target. This is why the correct benchmark is CPI-C rather than an index linked to wholesale prices, producer prices, or a broad national-accounts deflator.
Why the other options are wrong
- (A) Wholesale Price Index is wrong because inflation targeting now uses CPI-C, while WPI was the earlier wholesale-price measure and does not capture consumer retail inflation.
- (C) GDP Deflator is wrong because it is a broad national-accounts price measure, not the CPI benchmark used by the MPC for the inflation target.
- (D) Producer Price Index is wrong because India does not use PPI as the MPC's inflation-targeting index.
Concept
The monetary policy framework under Indian Economy includes the CPI-based flexible inflation targeting regime and the MPC's mandate. RAS frequently contrasts CPI, WPI, GDP deflator and PPI in the context of inflation measurement.