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Which of the following statements about the measurement of inflation in India is correct under the current framework?

India follows flexible inflation targeting with a CPI-based target of 4% and a tolerance band of plus or minus 2 percentage points, meaning 2% to 6%. The RBI's Monetary Policy Committee works to meet it. WPI is not the target index, and there is a defined band.

  1. AThe flexible inflation targeting framework uses a target of 4% CPI inflation with a tolerance band of plus or minus 2 percentage pointsCorrect
  2. BThe inflation target of 4% is based on the Wholesale Price Index with a band of plus or minus 1 percentage point
  3. CThe inflation target is set by the Finance Ministry alone as a range of 2% to 8% based on GDP deflator
  4. DThe target is 6% CPI inflation with no tolerance band

Explanation

The RBI Act amendment introduced flexible inflation targeting with a CPI (combined) target of 4% and a band of 2% to 6%. The target is notified by the Government in consultation with the RBI, and WPI is not the target index. The other options misstate the index, the band or the process.

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