Core Inflation

Context: 

S&P Global Ratings recently said core inflation in India had been declining sequentially, and an elevated 6.25% policy rate limits the need for further rate increases. 

More on News

• The Reserve Bank of India (RBI) has raised the short-term lending rate by 225 basis points since May 2022 to contain inflation,
• Inflation at present is mostly driven by external factors, especially global supply chain disruption, following the Russia-Ukraine war outbreak.
• The RBI’s rate-setting panel — Monetary Policy Committee (MPC) — will decide on the interest rate.

What Is Core Inflation?

• Core inflation is the change in the costs of goods and services, but it does not include those from the food and energy sectors.
• This measure of inflation excludes these items because their prices are much more volatile.
• It is most often calculated using the consumer price index (CPI), which is a measure of prices for goods and services. 

The Monetary Policy Framework:

• In 2016, the RBI Act, 1934 was amended to provide a statutory basis for the implementation of the flexible inflation targeting framework.
  • Inflation Target: Under Section 45ZA, the Central Government, in consultation with the RBI, determines the inflation target in terms of the Consumer Price Index (CPI), once in five years and notifies it in the Official Gazette.
• Accordingly, in 2016, the Central Government notified 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021, with the upper tolerance limit of 6 percent and the lower tolerance limit of 2 percent.
• In 2021, the Central Government retained the inflation target and the tolerance band for the next 5-year period – April 1, 2021, to March 31, 2026.
• Section 45ZB of the RBI Act provides for the constitution of a six-member Monetary Policy Committee (MPC) to determine the policy rate required to achieve the inflation target.

About Monetary Policy Committee:

• The Reserve Bank of India Act, 1934 was amended by Finance Act (India), 2016 to constitute MPC.
• Functions: The MPC is entrusted with the responsibility of deciding the different policy rates including MSF, Repo Rate, Reverse Repo Rate, and Liquidity Adjustment Facility.
• Composition of MPC:

• • The committee will have six members. The government will nominate three. No government official will be nominated to the MPC.
  • The other three members would be from the RBI with the governor being the ex-officio chairperson.
  • Deputy governor of RBI in charge of the monetary policy will be a member, as also an executive director of the central bank.

 News Source: The Hindu, rbi.org.in