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To revise and strengthen the monetary policy framework in India, RBI choses to target retail inflation because
- Wholesale inflation does not generally reflect price movements in all wholesale markets.
- Wholesale inflation does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India.
- Wholesale Price Index (WPI) often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.
Select the correct answer code:
- a)1, 2
- b)1, 3
- c)2, 3
- d)1, 2, 3
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
To revise and strengthen the monetary policy framework in India, RBI c...
- In January 2014, an expert committee of the RBI submitted its report on the ways to revise and strengthen the monetary policy framework in India, it chose to target retail inflation.
- Firstly, the committee pointed out that wholesale inflation “does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India”. This corresponds to the point made earlier about how WPI and CPI are different.
- Secondly, it pointed out that wholesale inflation “does not generally reflect price movements in all wholesale markets”. This happens because price quotations for some important commodities such as milk, LPG etc. are taken from retail markets.
- Thirdly, movements in WPI often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.
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To revise and strengthen the monetary policy framework in India, RBI c...
The Monetary Policy Framework in India
The Reserve Bank of India (RBI) has chosen to target retail inflation as a means to revise and strengthen the monetary policy framework in the country. This decision is based on several factors that make retail inflation a more accurate indicator of price movements and economic activity in India.
1. Wholesale inflation does not generally reflect price movements in all wholesale markets.
- The Wholesale Price Index (WPI) is commonly used to measure wholesale inflation in India. However, it primarily captures price movements in select wholesale markets and does not provide a comprehensive picture of price changes across all sectors.
- This limitation of WPI makes it an inadequate measure to gauge the overall inflationary pressures in the economy.
2. Wholesale inflation does not capture price movements in non-commodity producing sectors like services.
- In India, services contribute significantly to the country's economic activity, accounting for close to two-thirds of the GDP.
- However, the WPI mainly focuses on price movements in commodity-producing sectors and does not adequately reflect price changes in the services sector.
- By targeting retail inflation, which includes prices of both goods and services, the RBI can better capture the inflationary pressures across all sectors of the economy.
3. Wholesale Price Index (WPI) often reflects large external shocks and is subject to revisions.
- The WPI is influenced by various external factors such as global commodity prices, exchange rates, and international trade dynamics.
- As a result, the wholesale inflation rate based on WPI can be volatile and subject to significant revisions.
- In contrast, retail inflation, measured by the Consumer Price Index (CPI), provides a more stable and domestically driven indicator of inflationary pressures.
- By focusing on retail inflation, the RBI can have a more reliable and consistent measure to guide its monetary policy decisions.
Conclusion
In light of the limitations of wholesale inflation as a measure of overall price movements and economic activity, the RBI has chosen to target retail inflation to revise and strengthen the monetary policy framework in India. By considering the prices of both goods and services, retail inflation provides a more comprehensive and accurate reflection of inflationary pressures in the economy. Additionally, retail inflation is less influenced by external shocks and provides a more stable indicator for monetary policy formulation.
The Reserve Bank of India (RBI) has chosen to target retail inflation as a means to revise and strengthen the monetary policy framework in the country. This decision is based on several factors that make retail inflation a more accurate indicator of price movements and economic activity in India.
1. Wholesale inflation does not generally reflect price movements in all wholesale markets.
- The Wholesale Price Index (WPI) is commonly used to measure wholesale inflation in India. However, it primarily captures price movements in select wholesale markets and does not provide a comprehensive picture of price changes across all sectors.
- This limitation of WPI makes it an inadequate measure to gauge the overall inflationary pressures in the economy.
2. Wholesale inflation does not capture price movements in non-commodity producing sectors like services.
- In India, services contribute significantly to the country's economic activity, accounting for close to two-thirds of the GDP.
- However, the WPI mainly focuses on price movements in commodity-producing sectors and does not adequately reflect price changes in the services sector.
- By targeting retail inflation, which includes prices of both goods and services, the RBI can better capture the inflationary pressures across all sectors of the economy.
3. Wholesale Price Index (WPI) often reflects large external shocks and is subject to revisions.
- The WPI is influenced by various external factors such as global commodity prices, exchange rates, and international trade dynamics.
- As a result, the wholesale inflation rate based on WPI can be volatile and subject to significant revisions.
- In contrast, retail inflation, measured by the Consumer Price Index (CPI), provides a more stable and domestically driven indicator of inflationary pressures.
- By focusing on retail inflation, the RBI can have a more reliable and consistent measure to guide its monetary policy decisions.
Conclusion
In light of the limitations of wholesale inflation as a measure of overall price movements and economic activity, the RBI has chosen to target retail inflation to revise and strengthen the monetary policy framework in India. By considering the prices of both goods and services, retail inflation provides a more comprehensive and accurate reflection of inflationary pressures in the economy. Additionally, retail inflation is less influenced by external shocks and provides a more stable indicator for monetary policy formulation.
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To revise and strengthen the monetary policy framework in India, RBI choses to target retail inflation because Wholesale inflation does not generally reflect price movements in all wholesale markets. Wholesale inflation does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India. Wholesale Price Index (WPI) often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.Select the correct answer code:a)1, 2b)1, 3c)2, 3d)1, 2, 3Correct answer is option 'D'. Can you explain this answer?
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To revise and strengthen the monetary policy framework in India, RBI choses to target retail inflation because Wholesale inflation does not generally reflect price movements in all wholesale markets. Wholesale inflation does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India. Wholesale Price Index (WPI) often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.Select the correct answer code:a)1, 2b)1, 3c)2, 3d)1, 2, 3Correct answer is option 'D'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about To revise and strengthen the monetary policy framework in India, RBI choses to target retail inflation because Wholesale inflation does not generally reflect price movements in all wholesale markets. Wholesale inflation does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India. Wholesale Price Index (WPI) often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.Select the correct answer code:a)1, 2b)1, 3c)2, 3d)1, 2, 3Correct answer is option 'D'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for To revise and strengthen the monetary policy framework in India, RBI choses to target retail inflation because Wholesale inflation does not generally reflect price movements in all wholesale markets. Wholesale inflation does not capture price movements in non-commodity producing sectors like services, which constitute close to two-thirds of economic activity in India. Wholesale Price Index (WPI) often reflect large external shocks and as such, the wholesale inflation rate is often subject to large revisions.Select the correct answer code:a)1, 2b)1, 3c)2, 3d)1, 2, 3Correct answer is option 'D'. Can you explain this answer?.
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