How does India measure retail inflation?
- Inflation refers to a rise in the general level of prices of a set of goods and services over a period of time.
- India bases its retail inflation metrics on the Consumer Price Index (CPI).
- Consumer Price Index is an index which measures the weighted average of prices of a basket of consumer goods and services such as transportation, food and medical care.
- It is calculated by measuring price changes for each item in the predetermined basket of goods and services and averaging them.
- It is released by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation.
- The base year used to calculate CPI in India is 2012.
- Weightage of Sub-groups in CPI
- Food and beverages (45.86 percent of total weight)
- Miscellaneous (28.32 percent), of which Transport and communication (8.59 percent), health (5.89 percent), and education (4.46 percent).
- Housing (10.07 percent);
- Fuel and light (6.84 percent)
- Clothing and footwear (6.53 percent)
- Pan, tobacco and intoxicants (2.38 percent)
RBI’s role in tackling inflation
- The RBI’s explicit mandate is to conduct monetary policy. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth.
- In 2016, the Reserve Bank of India Act, 1934, was amended to provide a statutory basis for the implementation of a flexible inflation-targeting framework, where the Centre and the RBI would review and agree upon a specific inflation target every five years.
- Under this, 4% was set as the Consumer Price Index (CPI) inflation target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6% and the lower tolerance limit of 2%.
- In 2021, the Centre decided to retain the inflation target of 4%, with a tolerance band of +/- 2 percentage points for the period April 1, 2021, to March 31, 2026.
- When the Reserve Bank of India fails to meet the inflation target, it will send a report to the central government stating reasons and remedial actions that will be taken. A breach of the “tolerance level” for three consecutive quarters will constitute a failure of monetary policy.
Why in News?
- India’s retail inflation declined marginally to 6.44 per cent year-on-year in February as against 6.52 per cent in January.
- The inflation rate has remained above the Reserve Bank of India’s (RBI) tolerance band of 2-6 per cent for the second straight month.