Consumer Price Index (CPI)

Explanation

All three pairs are correctly matched. First, CPI (Rural) assigns a food and beverages weight of approximately 54%, which is notably higher than the food weight in CPI (Urban), consistent with the fact that food dominates rural consumption baskets — a structural feature corroborated by the NABARD survey finding that food accounts for over 53% of rural household spending. Second, the Reserve Bank of India's Monetary Policy Committee (MPC) does rely on household inflation-expectations surveys — such as the RBI's Inflation Expectations Survey of Households — as a forward-looking input in its policy deliberations, to judge whether inflation expectations are well-anchored around the 4% target. Third, under the amended RBI Act and the flexible inflation-targeting (FIT) framework adopted in India, the government has set the CPI-Combined inflation target at 4%, with an upper tolerance limit of 6% and a lower tolerance limit of 2% — that is, a symmetric band of ±2 percentage points around 4%.

Explanation

Statement 1 is correct. When the CPI is rebased using a more recent Household Consumption Expenditure Survey (such as the HCES 2023-24), the revised weights capture current household spending behaviour more accurately. This makes the index a better tool for assessing changes in purchasing power, real incomes, and consumption patterns — the standard rationale for periodic CPI rebasing. Statement 2 is incorrect. The updated CPI series based on HCES 2023-24 data actually increased the share of core items (non-food, non-fuel components such as housing, services, and manufactured goods) by approximately 10 percentage points, while the share of volatile food prices correspondingly declined. This means headline inflation is relatively less driven by food price swings under the new series compared to the old one — the opposite of what Statement 2 claims. Statement 3 is correct. This reflects a well-established structural feature of India's CPI construction: rural consumption baskets assign a larger weight to food and beverages than urban baskets do. During episodes of food price inflation, this compositional difference causes rural CPI to rise faster than urban CPI. This rural-urban divergence is a direct consequence of differential component weights — the core mechanism by which the CPI's weighting structure translates price changes into headline inflation readings.

Explanation

Statement 1 is correct. Food and beverages constitute approximately 45.86% of the CPI basket (CPI-Combined, base year 2012), making it by far the heaviest single group. This heavy weighting is why food price spikes — such as those seen in vegetables and pulses — disproportionately push headline CPI upward, as reflected when retail inflation breached the upper tolerance band. Statement 2 is correct. The Reserve Bank of India Act, 1934 (as amended in 2016) mandates a 4% CPI inflation target with a ±2% tolerance band (i.e., 2%–6%). If inflation remains outside this band for three consecutive quarters, the RBI is required to submit a report to the Central Government explaining the reasons for the failure, remedial measures proposed, and the estimated timeframe for returning to the target — this is the 'failure' reporting obligation under Section 45ZN of the RBI Act. Statement 3 is incorrect. The CPI used for India's monetary policy inflation-targeting framework is CPI-Combined (urban + rural), compiled by the National Statistical Office (NSO) under the Ministry of Statistics and Programme Implementation (MoSPI) — not the CPI for Industrial Workers (CPI-IW), which is a separate index compiled by the Labour Bureau under the Ministry of Labour and Employment, and is used primarily for wage-revision and dearness-allowance calculations. Conflating CPI-IW with the monetary-policy CPI is a common misconception; the two series have different base years, coverage, and institutional provenance.

Explanation

Statement 1 is correct. India's flexible inflation-targeting (FIT) framework, introduced through an amendment to the Reserve Bank of India Act, 1934, mandates the RBI to maintain CPI inflation at 4 per cent, within a tolerance band of ±2 per cent (i.e., 2–6 per cent). Breaching the upper limit of 6 per cent, as happened in October, triggers accountability provisions under the framework. Statement 2 is correct. The CPI in India is published as separate series for rural India (CPI-Rural) and urban India (CPI-Urban), which are then combined into an all-India composite. The two series use different consumption weights derived from household expenditure surveys, which is why rural food inflation and urban food inflation can and do diverge — for example, rural food inflation tends to be higher because food commands a larger share of expenditure in rural consumption baskets. Statement 3 is false. Food and beverages is by far the largest sub-group in India's CPI basket, carrying a weight of approximately 45–46 per cent in the all-India composite. This high weighting means that sharp price increases in food items — such as onions, vegetables, and cereals — have a substantial and direct impact on the headline CPI number. The claim that food carries 'negligible weight' fundamentally misrepresents the construction of the CPI.