Why in the news ?

• The Monetary Policy Committee of RBI is expected to maintain the status quo for the third straight review meeting as retail inflation is hovering close to the central bank’s upper tolerance limit.

More on news

• CPI or the retail inflation- the central bank’s primary yardstick for setting interest rates — was 5.21% in December, just below the 6% upper band mandate of RBI.
• Rising food prices was one of the main factors behind the 17­ month-­high retail inflation.
• Inflation is expected to accelerate after the government’s budget last week widened its fiscal deficit target for the fiscal year starting in April to help finance a sharp increase in spending in the rural areas and on healthcare and due to rising oil prices
• All this would mean the RBI would hold the repo rate at 6%, though the stance of the policy would likely continue to stay neutral.

Repo Rate

• Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.
• Repo rate is used by monetary authorities to control inflation.
• In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
• The central bank takes the contrary position in the event of a fall in inflationary pressures. Repo and reverse repo rates form a part of the liquidity adjustment facility.

Consumer Price Index (CPI)

• The Consumer Price Index (CPI) measures changes in the price level of a 'market basket' of consumer goods and services  purchased by households.
• The CPI is a statistical estimate constructed using the prices of a  sample of representative items whose prices are collected periodically.
• The calculation involved in CPI is done thorough and various categories and sub category on consumption items basis of consumers like urban and rural.
• The overall index of price is calculated mostly by national statistical agencies.

Wholesale Price Index (WPI)

• WPI index reflects average price changes of goods that are bought and sold in the wholesale market.
• Wholesale price indexes report monthly to show the average price changes of goods sold in bulk, and they are a group of the indicators that follow growth in the economy.
• WPI includes all the manufactured products and CPI includes food and services part.

Source

The Hindu, Indian Express and Economic Times.