Inflation in India - Types, Causes, Measurement (CPI, WPI), Control Measures, and RBI's Role

Inflation in India - Types, Causes, Measurement (CPI, WPI), Control Measures, and RBI's Role

Inflation means a sustained rise in the general level of prices over time. In simple words: when inflation rises, the same ₹100 buys fewer goods and services. For UPSC, inflation is a high-frequency topic because it connects directly with growth, poverty, inequality, fiscal policy, monetary policy, exchange rate, current account, and welfare schemes.

In India, retail inflation is primarily tracked through the Consumer Price Index (CPI), and wholesale/producer-side price movement through the Wholesale Price Index (WPI). A major current development is that December 2025 was the last CPI release on base 2012=100; the revised CPI series on base 2024=100 is scheduled to be released from 12 February 2026.

1) Why Inflation Matters for UPSC (GS3 + Prelims)

Prelims Angle

• Basic concepts: headline vs core inflation, CPI vs WPI, inflation targeting band, base year revision, "base effect".
• Institutions: NSO/MoSPI (CPI), Office of Economic Adviser (WPI), RBI/MPC (inflation targeting).
• Instruments: repo rate, CRR, OMO, SDF/MSF, open market operations, buffer stocks, export-import controls.

Mains Angle

• Trade-off: inflation control vs growth revival (policy lags and sacrifice ratio).
• Food inflation and vulnerability of the poor (high weight of food in CPI basket).
• Coordination challenges between RBI (demand management) and government (supply-side, fiscal policy).
• Inflation expectations and credibility of monetary policy framework.

2) Key Definitions and Concepts

3) Types of Inflation

4) Causes of Inflation in India (High-Probability UPSC Themes)

A) Food Inflation (Most common driver of spikes)

• Monsoon and weather shocks: uneven rainfall, floods, droughts affect production of vegetables, pulses, cereals.
• Supply chain constraints: storage gaps, cold-chain shortage, transport disruptions, mandi-level inefficiencies.
• Seasonality + perishability: vegetables and fruits show sharp short-term volatility.
• Policy and procurement effects: MSP signals, procurement intensity, buffer stock operations can influence market prices.
• Global linkages: edible oils, pulses imports; world prices transmit to domestic market.

Why food matters more in India: In the CPI (Combined) basket (base 2012=100), Food and beverages has a weight of 45.86, the largest among all groups.

B) Fuel and Energy Inflation

• International crude oil prices: India's import dependence transmits global shocks to domestic fuel/transport costs.
• Taxes and administered components: excise/VAT structures and pass-through determine how global prices affect retail prices.
• Second-round effects: higher freight and input costs raise prices across goods and services.

C) Demand-side Drivers

• Strong consumption/investment demand without matching supply expansion.
• Easy liquidity/credit conditions can boost demand (especially discretionary spending and asset markets).
• Fiscal stimulus (higher government expenditure) can be inflationary if supply response is slow.

D) Exchange Rate and Imported Inflation

• Rupee depreciation makes imports costlier (fuel, fertilizers, edible oils, industrial inputs).
• Global commodity cycles (metals, chemicals, food) influence domestic pricing.

E) Inflation Expectations and Wage-Price Dynamics

• Expectations channel: if households and firms expect higher inflation, they demand higher wages and raise prices in advance.
• Persistence: inflation becomes "sticky", requiring stronger policy action to break it.

5) Measurement of Inflation in India

5.1 Consumer Price Index (CPI)

What it measures: Retail prices of a fixed basket of goods and services consumed by households (rural and urban). CPI is the main measure used for India's inflation targeting framework.

Who compiles CPI: National Statistical Office (NSO), Ministry of Statistics & Programme Implementation (MoSPI). CPI price data are collected from a large network of rural and urban locations (e.g., in the 2012-base series, the press release notes collection from 1114 urban markets and 1181 villages).

Base year revision (very important current development): December 2025 was the last CPI release on base 2012=100, and the revised CPI series on base 2024=100 is scheduled to be released from 12 February 2026.

CPI Variants

• CPI (Rural)
• CPI (Urban)
• CPI (Combined) (commonly used headline CPI for policy and public discussion)

Note: CPI (Rural) for housing is not compiled in the series shown in the official release tables.

CPI Group Weights (Combined) - Base 2012=100 (Till December 2025 series)

How CPI Inflation is Calculated (Conceptual)

• Point-to-point (YoY) inflation: % change in CPI index compared to the same month last year (most common headline).
• Month-on-month (MoM): % change compared to previous month (useful for momentum tracking, but more volatile).
• Annual average inflation: average CPI over a year vs previous year (used in some policy/analysis contexts).

5.2 Wholesale Price Index (WPI)

What it measures: Price movement of goods at the wholesale/producer level (bulk transactions). Services are not covered like in CPI.

Who compiles WPI: The Office of the Economic Adviser under the Department for Promotion of Industry and Internal Trade (DPIIT) releases WPI.

Base year: Current WPI series uses base year 2011-12=100.

Weights (Major Groups in WPI):

How WPI is used and what it includes: Official notes highlight that WPI captures wholesale prices of goods and is primarily used as a GDP deflator; it also states WPI (2011-12) uses basic prices and does not include certain elements like taxes and some charges/discount adjustments (as per the Office of Economic Adviser's description).

Release frequency (exam-relevant detail): DPIIT releases WPI monthly (typically around the 14th, with a lag relative to the reference month), and compilation uses data from institutional sources and selected manufacturing units (as described in official release notes).

5.3 CPI vs WPI (Most Asked Comparison)

6) Control of Inflation: Policy Toolkit in India

Inflation control needs a diagnosis-first approach. If inflation is mainly due to food supply shocks, only raising interest rates may not quickly fix it. If inflation is due to demand overheating, monetary tightening is more effective.

6.1 Monetary Measures (RBI-led)

• Policy repo rate changes: raising repo makes borrowing costlier → lowers demand → eases inflation (with a time lag).
• Liquidity management: tools like CRR changes, open market operations (OMOs), and standing facilities help reduce excess money/credit.
• Communication and expectations: credible guidance reduces "panic pricing" and anchors wage/price setting.
• Exchange rate management (limited, not a fixed target): reduces imported inflation volatility during extreme episodes.

6.2 Fiscal Measures (Government-led)

• Fiscal consolidation: reduces demand pressure and borrowing needs.
• Tax policy: calibrated cuts in import duties/excise (for fuel/essential items) can soften inflation, but may hurt revenues.
• Targeted transfers: protects poor from inflation without large generalized subsidies that can distort markets.

6.3 Supply-side / Administrative Measures (Most relevant for food inflation)

• Buffer stock operations: releasing grains to stabilize prices; improved storage reduces wastage.
• Trade policy: lowering import duties, allowing imports, or restricting exports during extreme shortages (short-term relief, long-term credibility issues).
• Better logistics: cold chain, processing, transport reforms reduce spikes in perishables.
• Market reforms: improving competition and reducing intermediation margins can lower retail inflation.

7) RBI's Role: Flexible Inflation Targeting (FIT) and MPC

7.1 Inflation Target and Band

India follows a flexible inflation targeting framework with a medium-term target of 4% CPI inflation, with a tolerance band of 2% to 6%. A key official statement notes that the government retained this target and band for the five-year period April 2021 to March 2026.

7.2 Monetary Policy Committee (MPC): Composition and Legal Basis

The MPC is a statutory body under the RBI Act. Its composition (as laid out in the Act) is:

• RBI Governor (Chairperson)
• Deputy Governor in charge of Monetary Policy
• One RBI officer nominated by the Central Board
• Three external members appointed by the Central Government

7.3 What MPC Actually Does

• Sets the policy repo rate required to achieve the inflation target (while supporting growth).
• Assesses inflation outlook, growth conditions, risks (global commodity prices, monsoon, exchange rate, fiscal stance).
• Uses a forward-looking approach because monetary policy works with a lag.

7.4 "Failure to Maintain Inflation Target" and Accountability

The RBI Act provides that if the Bank fails to meet the inflation target, it must submit a report to the Central Government stating: (a) reasons for failure, (b) remedial actions proposed, and (c) estimated time to achieve the target.

Under the framework, inflation outside the tolerance band for three consecutive quarters is treated as a "failure" condition (commonly noted in policy summaries).

8) Recent and Emerging Issues (2025-26) You Should Mention in Answers

A) CPI Base Revision to 2024=100

• Official release indicates the shift from base 2012=100 to base 2024=100 starting with releases scheduled from 12 February 2026.
• Implication: revised weights and consumption patterns may change measured inflation dynamics and improve representativeness.

B) WPI Base Revision + Roadmap to PPI

• The government constituted a Working Group to revise WPI base from 2011-12 to 2022-23.
• Its Terms of Reference include suggesting the commodity basket and methodology, and recommending a roadmap for switch over from WPI to Producer Price Index (PPI).
• The Working Group was asked to submit its final report within 18 months of the notification.

9) Effects of Inflation (Answer Enrichers)

• On poor and fixed-income groups: regressive impact; food inflation hits hardest because essentials dominate their basket.
• On savings and investment: high inflation can discourage financial savings; if rates don't compensate, real returns fall.
• On growth: mild inflation may coexist with growth; high inflation creates uncertainty, hurts investment and competitiveness.
• On external sector: higher domestic inflation can reduce export competitiveness and worsen current account if not offset by exchange rate moves.
• On government finances: can raise subsidy burden and interest payments; also temporarily boosts nominal tax collections.

10) Answer Writing Framework (UPSC Mains Ready)

Use this 5-part structure:

1. Define inflation + mention CPI as headline measure.
2. Diagnose the cause (food shock vs demand pull vs imported).
3. Explain transmission (how shock spreads: fuel → freight → core).
4. Policy response mix (RBI demand management + government supply-side).
5. Way forward (credibility, data improvements, storage/logistics, targeted support).

11) Prelims-Focused Quick Revision Points

• CPI is the main measure for inflation targeting; WPI tracks wholesale prices of goods.
• CPI (Combined) group weights (base 2012=100): Food & beverages 45.86; Misc 28.32; Housing 10.07; Fuel & light 6.84; Clothing & footwear 6.53; Pan/tobacco 2.38.
• WPI major group weights: Primary Articles 22.62; Fuel & Power 13.15; Manufactured Products 64.23.
• Inflation target: 4% with 2–6 band retained for April 2021–March 2026 (official statement).
• Dec 2025 was last CPI release on base 2012=100; revised CPI base 2024=100 begins from Feb 12, 2026 release schedule.
• Working group formed to revise WPI base to 2022-23 and roadmap to PPI.

12) Mains Practice Questions

1. "In India, food inflation frequently dominates headline inflation." Examine the structural reasons and suggest policy measures beyond monetary tightening.
2. Discuss the effectiveness and limitations of RBI's flexible inflation targeting framework in handling supply-side inflation shocks.
3. Compare CPI and WPI as measures of inflation. Why do they diverge, and what are the implications for policy?
4. Explain how inflation expectations influence inflation persistence. How can credibility and communication help?

13) Practice MCQs (with Answers)