Why in the news ?

• Less than a week after the Union Budget, the Reserve Bank of India (RBI) on Wednesday kept the key policy rate unchanged at 6 per cent for the third consecutive time and raised the concerns about the future outlook for price gains.

More on news

• The central bank raised its March quarter Consumer Price Index (CPI) inflation forecast to 5.1% and projected an inflation range of 5.1-5.6% in the first half of the next fiscal year
• However, RBI posits a revival in growth—projecting an acceleration in economic growth to 7.2% from a level of 6.6% in the current fiscal year. It premises this on a host of factors including revival in investment demand and strengthening exports.
• By opting to hold interest rates despite its evinced concerns about the growing threat of inflation, the central bank has signalled it will do its bit to protect the nascent recovery underway in the economy.
• Five members of the panel voted to keep rates unchanged, while Michael Patra, executive director at the central bank, wanted to raise rates by 25 basis points. A basis point is one-hundredth of a percentage point.
• The decision comes at a time when inflation as measured by the CPI has been accelerating and has topped 4%, the central bank’s medium-term target, for two consecutive months.
• The latest data shows CPI inflation accelerated to 5.21% in December, the fastest pace in 17 months, from 4.88% in November. The rise was partly due to the statistical impact of a low base.
• The MPC has a mandate to ensure inflation remains in a band between 2% and 6%. For the second half of the next fiscal, inflation is projected at 4.5­4.6%, with ‘risks tilted to the upside’.
• Among the upside risks to inflation, the MPC noted that pick­up in global growth could exert further pressure on crude oil, with the higher minimum support price to farmers, announced in the Budget, adding to the uncertainty.
• However, the exact impact of higher MSP on inflation could not be fully assessed at this stage, the RBI said.
• The proposed increase in customs duty on a number of items and fiscal slippage could also impinge on inflation outlook, the RBI added.

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, The Mint and Economic Times.