According to the Reserve Bank of India (RBI), what is the forecast for headline inflation in Financial Year 2025 ?

Question

UnlockIAS · Accepted Answer

Correct — C, 4.5%. The Monetary Policy Committee's resolution of 5 April 2024, the first policy of financial year 2024-25, states it exactly: 'Taking into account these factors and assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced.' The same policy kept the repo rate at 6.50 per cent, with the standing deposit facility at 6.25 and the marginal standing facility and Bank Rate at 6.75, and projected real GDP growth for 2024-25 at 7.0 per cent. Read the number in context and it stops being an arbitrary figure: RBI's statutory mandate is CPI inflation of 4 per cent within a band of plus or minus 2 per cent, so a projection of 4.5 says the Committee expected inflation to end the year inside the band but still above the target, which is why it held the rate and stayed 'focused on withdrawal of accommodation'. There is a timing point that a careful student should notice, and it cuts in favour of this answer rather than against it. Candidates sat this paper on 13 December 2024, one week after the MPC of 4 to 6 December 2024 had raised the projection: that resolution puts 'CPI inflation for 2024-25 at 4.8 per cent with Q3 at 5.7 per cent; and Q4 at 4.5 per cent', after headline CPI surged above the upper tolerance level to 6.2 per cent in October, and it cut the growth projection to 6.6 per cent. So the most recent RBI number on the day of the exam was 4.8 per cent — and 4.8 is not on the page. The setter was working from the projection RBI had carried since April, and 4.5 is the only option that corresponds to any RBI forecast for that year.

Why the other options are wrong — (a) Not an RBI projection for 2024-25 on any policy date. It is close enough to the 4 per cent statutory target to look plausible to a candidate who half-remembers the target rather than the forecast, and that is the whole design of the option — the target and the projection are different numbers, and the question asks for the second.  (b) Corresponds to nothing RBI printed for the year. It sits between the 4.5 per cent April projection and the 6 per cent upper tolerance limit, which makes it a comfortable-looking middle guess, but the MPC's projections for 2024-25 were 4.5 per cent from April and 4.8 per cent from December, and neither rounds to five.  (d) The highest option and the furthest from the mark. Actual monthly prints did rise to 6.2 per cent in October 2024, so a candidate recalling the news flow rather than the forecast may reach for a high number — but a monthly outturn is not an annual projection, and RBI never forecast 5.5 per cent for the year as a whole.

Concept: India has run a formal inflation-targeting framework since 2016. The Reserve Bank of India Act, as amended, sets the inflation target the Government notifies in consultation with RBI — 4 per cent CPI inflation with a tolerance band of 2 percentage points either side — and creates the six-member Monetary Policy Committee to decide the policy rate by majority. The Committee meets at least four times a year, in practice six, and each resolution carries three things a student should extract: the rate decision, the stance, and the quarter-by-quarter projections for inflation and growth. Two vocabulary points decide many questions. 'Headline' inflation is the full CPI basket, while 'core' inflation excludes food and fuel — in February 2024 headline was 5.1 per cent while core had fallen to 3.4 per cent, one of the lowest readings in the series. And the operating rates form a corridor: the repo rate in the middle, the standing deposit facility rate 25 basis points below it as the floor, and the marginal standing facility rate 25 basis points above as the ceiling. Note too that the measure itself changed: India's headline inflation was reported on the Wholesale Price Index for decades, and CPI became the target variable only with the 2016 framework.

State PCS 2024 Q117 — Economy PYQ with Answer

State PCS 2024 Q117 — Economy PYQ with Answer