MONETARY POLICY FRAMEWORK
Core Obj =
Price stability + Growth (RBI Act 1934)
Stat Backing =
2016 RBI Act Amend (Flexible Inflation Targeting / FIT)
Pre-2016 =
RBI Gov sole authority
Post-2016 =
Democratic committee (MPC)
Target Setting =
Govt + RBI (Every 5 yrs)
Metric =
CPI (Not WPI)
Rationale =
Accurately reflects retail cost of living + anchors expectations
Mandate Parameters
Target =
4% CPI
Tolerance =
↑6% (Upper) / ↓2% (Lower)
Active Period = Apr 1, 2026 ➔
Mar 31, 2031 (Web Correction)
MONETARY POLICY COMMITTEE MPC
Origin =
Sec 45ZB RBI Act (Finance Act 2016 / Urjit Patel Comm)
Core Role = Determine policy repo rate ➔
hit target
Composition =
6 Members
Internal (3) =
RBI Gov (Chair) │ Deputy Gov (Monetary Policy) │ 1 Central Board Nominee
External (3) =
4-yr term
Re-appointment =
STRICTLY NO (Sec 45ZC)
Rationale =
Ensures independent voting (0 pressure for 2nd term)
MPC OPERATIONS AND TRANSPARENCY
Meetings =
≥4x/yr (Typically bi-monthly)
Quorum =
4 members (Prevents minority rule)
Voting Rules
System =
Majority vote (1 member = 1 vote)
Tie/Deadlock (3-3) = RBI Gov ➔
2nd/Casting vote (Ensures definitive decision)
Transparency
Minutes =
Published 14th day post-meeting (Incl: resolutions, individual votes, written justifications)
MPR (Monetary Policy Report) =
Semi-annual (Details: liquidity, inflation forecasts, markets)
TARGET FAILURE PROTOCOL
Legal Failure Trigger =
Sec 45ZN RBI Act
Avg inflation ➔
Breaches tolerance (>6% OR 6% Jan-Sept)
Purpose =
Forces central bank transparency + sovereign accountability
LIQUIDITY MANAGEMENT
Operating Target =
Overnight call money market rate
Measurement = WACR (Weighted Average Call Money Rate) ➔
Anchored to repo rate
LAF Corridor (Liquidity Adjustment Facility)
Upper Ceiling =
MSF (Marginal Standing Facility)
Middle =
Policy Repo Rate
Rationale = Controls short-term rates in predictable band ➔
Prevents system liquidity volatility
Lower Floor =
SDF (Standing Deposit Facility)
INFLATION METRICS CPI VS CORE
Headline CPI =
Primary monetary anchor
Measures =
Total price change of ALL basket goods/services (Point-to-point / YoY)
Core Inflation =
Headline CPI ➖ (Food & Bev ➕ Fuel & Light)
Utility =
Stable gauge of structural/long-term trends
Policy Value =
Prevents premature hawkish rate hikes from temporary exogenous shocks (monsoons/geopolitics)
CPI 2024 STRUCTURAL REVISION
Authority =
MoSPI
Base Year =
2024=100 (Replaced 2012=100) (1st overhaul in decade)
Data Source =
HCES 2023-24 (Household Consumption Expenditure Survey)
Global Standard =
UN COICOP 2018 framework
Basket Expansion = 299 ➔
358 items
New additions =
Rural housing rent │ e-commerce weekly price variations
Weight Changes
Food & Beverages =
↓ 36.75% (Down from 45.86%)
Housing =
16.48%
Rationale = ↑ Incomes ➔
↓ % spent on food │ ↑ % spent on rent/health/OTT/digital
WHOLESALE PRICE INDEX WPI
Definition =
Avg change in bulk commodity prices (Economy-wide producer inflation)
Authority =
OEA (Min of Commerce & Industry) ➖ NOT MoSPI/NSO
Base Year =
2022-23 (Web Correction)
Key Exclusion =
Services strictly excluded (0 impact from rent/education/medical)
Historical Context =
Headline inflation metric pre-Urjit Patel
Basket Weights (2022-23 Base)
Primary Articles =
22.76%
Fuel & Power =
14.11%
Manufactured Products =
63.13% (Dominant)
CPI VS WPI DIVERGENCE AND SHOCKS
Data Capture Level
CPI =
Retail markets (Rural + Urban)
WPI =
Basic prices (Ex-factory / ex-mine / mandi)
Indirect Taxes (e.g., GST)
CPI =
INCLUDED (Measures actual out-of-pocket living costs)
WPI =
EXCLUDED (Ideal deflator for real GDP at basic prices)
Divergence Dynamics
E.g., Global commodity crash ➔
WPI deflation │ CPI stays elevated (Sticky retail/high food weight)
Shock Transmission
Agri/Supply Shocks (Poor monsoons) ➔
Immediate CPI impact (Food weight 36.75%)
Global Commodity Shocks (Base metal/machinery/crude/steel) ➔
Immediate WPI impact (Mfg weight 63.13%)
Time Lag Effect
WPI intermediate shocks ➔
CPI spillover ONLY IF/WHEN mfg passes costs to final retail consumers