Question

Which price index is being used to measure inflation by the Reserve Bank of India?

• A. Purchasing Power Parity based Index
• B. Wholesale Price Index
• C. Industrial Cost and Price Indices
• D. GDP Deflator
• E. Consumer Price Index

Answer 1

Answer: (E)

The Reserve Bank of India (RBI) measures inflation primarily using the Consumer Price Index (CPI). The CPI is a comprehensive index representing the changes in the price level of a basket of consumer goods and services purchased by households. It provides an aggregate measure of a country's inflation rate. Here's why the CPI is used:

• Representative Basket: CPI reflects the cost of living by considering a wide range of items that a typical household might purchase.
• Consumer Focus: This index focuses on the price changes from the consumer's perspective, which is crucial for understanding the impact of inflation on the common populace.
• Policy Relevance: By tracking CPI, the RBI can implement monetary policies that stabilize the economy by controlling inflation, thus ensuring consumer welfare.

Therefore, among the given options, the correct answer is:

Consumer Price Index