Inflation Measurement and Price Indices in India
Indian Economy
- PYQs8
- Articles1
Background
Understanding the different types of price indices, their methodologies, recent updates, and their implications for monetary policy (RBI's focus on CPI) and overall economic stability is fundamental.
Inflation measurement in India relies on various price indices, primarily the Consumer Price Index (CPI) for retail inflation and the Wholesale Price Index (WPI) for wholesale price changes. These indices track price movements of a basket of goods and services, providing crucial data for monetary policy decisions, economic analysis, and understanding purchasing power.
Facts & tables
- CPI Updates
- CPI base year updated to 2024, with a more inclusive basket and accurate weightages.
- WPI Updates
- WPI series updated, contributing to a more accurate GDP deflator.
- Introduction of PPI
- New Producer Price Index (PPI) introduced, intended to replace WPI in five years.
- PPI Significance
- PPI is standard in developed economies, providing producer-level price information for goods and services.
| Type | Reference |
|---|---|
| Conceptual area | Indian Economy |
| Body | Role |
|---|---|
| Reserve Bank of India (RBI) | Uses |
| Ministry of Commerce and Industry | Implements |
| Ministry of Statistics and Programme Implementation (MoSPI) | Implements |
Prelims angle
Prelims angle: Multi-statement analysis
Prelims angle: Conceptual understanding
- CPI base year 2024, improved basket.
- WPI series updated.
- PPI introduced, to replace WPI.
- CPI crucial for RBI's monetary policy.
- MoSPI (CPI) and Ministry of Commerce (WPI, PPI) are key agencies.
| Year | Framing tags |
|---|---|
| 2022 | Institutional roles and functions, Factual recall |
| 2022 | Statement-based questions, Conceptual understanding |
| 2022 | Multi-statement analysis, Conceptual understanding |
| 2020 | Multi-statement analysis, Conceptual understanding |
| 2019 | Conceptual understanding, Cause and effect relationships |
| 2019 | Statement-based questions, Factual recall |
| 2015 | Factual recall, Terminology-based question |
| 2015 | Factual recall, Institutional roles and functions |
Timeline
-
Indian Economy
Conceptual area
-
Prelims 2015
Factual recall, Terminology-based question
-
Prelims 2015
Factual recall, Institutional roles and functions
-
Prelims 2019
Conceptual understanding, Cause and effect relationships
-
Prelims 2019
Statement-based questions, Factual recall
-
Prelims 2020
Multi-statement analysis, Conceptual understanding
-
Prelims 2022
Institutional roles and functions, Factual recall
-
Prelims 2022
Statement-based questions, Conceptual understanding
-
Prelims 2022
Multi-statement analysis, Conceptual understanding
-
Essential upgrades: On upgrades to India’s statistical databases
India has updated its key price indices: CPI (base year 2024, improved basket), WPI (new series), and introduced a PPI to eventually replace WPI. These changes aim for more realistic inflation readings, better GDP deflator calculation, and alignment with international standards.
See also
Past papers
2015–2022 · 8 questions
In the news
Essential upgrades: On upgrades to India’s statistical databases
India has updated its key price indices: CPI (base year 2024, improved basket), WPI (new series), and introduced a PPI to eventually replace WPI. These changes aim for more realistic inflation readings, better GDP deflator calculation, and alignment with international standards.
Try these PYQs
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?
Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.
Which of the following brings out the ‘Consumer Price Index Number for Industrial Workers’?
The Labour Bureau, attached to the Ministry of Labour and Employment, is responsible for compiling and publishing the Consumer Price Index Number for Industrial Workers (CPI-IW) in India. This index tracks changes in the retail prices of a basket of goods and services consumed by industrial workers. It serves as a crucial indicator of inflation faced by this specific segment of the population. The Labour Bureau is responsible for maintaining:
- CPI (Industrial Workers) - CPI (Rural Labourers) - CPI (Agricultural Labourers)
In the Index of Eight Core Industries, which one of the following is given the highest weight?
About Eight Core Sectors: These comprise 40.27% of the weight of items included in the Index of Industrial Production (IIP). The eight core sector industries in decreasing order of their weightage:
Refinery Products> Electricity> Steel> Coal> Crude Oil> Natural Gas> Cement> Fertilizers.
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
The responsibility for maintaining price stability and controlling inflation in India lies primarily with the Reserve Bank of India (RBI). The RBI formulates and implements monetary policy to maintain price stability and ensure adequate flow of credit to productive sectors of the economy. As the central bank of the country, the RBI uses various tools such as repo rate, reverse repo rate, cash reserve ratio (CRR), and statutory liquidity ratio (SLR) to influence liquidity and interest rates in the economy, thereby affecting inflationary pressures.
With reference to the Indian economy, consider the following statements:
1. If the inflation is too high, Reserve Bank of India (RBI) is likely to buy government securities.
2. If the rupee is rapidly depreciating, RBI is likely to sell dollars in the market.
3. If interest rates in the USA or European Union were to fall, that is likely to induce RBI to buy dollars.
Which of the statements given below is/are correct?
Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.
Show 3 more PYQs
With reference to Convertible Bonds consider the following statements:
1. As there is an option to exchange the bond for equity, Convertible Bonds pay a lower rate of interest.
2. The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices.
Which of the statements given above is / are correct?
A convertible bond is a type of debt security that provides an investor with a right or an obligation to exchange the bond for a predetermined number of shares in the issuing company at certain times of a bond's lifetime. It is a hybrid security that possesses features of both debt and equity. * Statement 1 is correct: Convertible bonds tend to offer a lower coupon rate or rate of return in exchange for the value of the option to convert the bond into a common stock. Investors will generally accept a lower coupon rate on a convertible bond, compared with the coupon rate on an otherwise identical regular bond, because of its conversion feature. This enables the issuer to save on interest expenses, which can be substantial in the case of a large bond issue. * Statement 2 is correct: The option to convert to equity affords the bondholder a degree of indexation to rising consumer prices as equity prices can differ widely from the given interest and the difference in that can be used as a hedge for inflation.
In a given year in India, official poverty lines are higher in some States than in others because
* The poverty line is determined by the cost of a basket of essential goods and services needed for a person to meet their basic needs. * If the price of these essentials varies significantly between states, the poverty line needs to be adjusted to reflect the different costs of living. * So, even if poverty rates might be similar, states with higher prices for essential goods will have a higher official poverty line. Therefore, the correct answer is B) Price levels vary from State to State.
Consider the following statements:
1. Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries.
2. In terms of PPP dollars, India is the sixth largest economy in the world.
Which of the statements given above is/are correct?
Statement 1 is correct: Purchasing Power Parity (PPP) exchange rates are calculated by comparing the prices of the same basket of goods and services in different countries. Statement 2 is incorrect: India is not the sixth-largest economy in the world in terms of PPP dollars. It is currently the third largest economy in terms of PPP dollars, after China and the United States.