Revision note: Money, Banking and Inflation

• RBI 1935, nationalised 1949; MPC target 4% ± 2% CPI
• CRR kept with the RBI; SLR kept by the banks themselves
• Raising the repo rate cools inflation
• NPA = more than 90 days overdue; IBC 2016

Inflation: CPI vs WPI

How India measures price rise and which index the RBI targets.

Meaning

Inflation is a general rise in prices, which reduces the buying power of money.

Two main indices

• CPI (Consumer Price Index) – retail prices; released by NSO, MoSPI. RBI uses CPI (Combined) for its inflation target.
• WPI (Wholesale Price Index) – wholesale prices; released by the Office of the Economic Adviser, DPIIT (Ministry of Commerce & Industry).

Inflation targeting

• Target: 4% CPI inflation with a band of ±2% (2%–6%), set under the amended RBI Act, 1934.
• Decided by the Monetary Policy Committee (MPC) of 6 members.