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Difficulty: HardInflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms

With reference to price indices and monetary policy tools in India, consider the following statements:

1. The Wholesale Price Index (WPI) measures price changes strictly for goods and excludes the service sector, whereas the Consumer Price Index (CPI Combined) includes both goods and services.
2. The relative weightage assigned to food items is higher in the Wholesale Price Index (WPI) basket than in the Consumer Price Index (CPI Combined) basket.
3. An increase in the Cash Reserve Ratio (CRR) by the Reserve Bank of India increases the lendable capacity of commercial banks, thereby expanding market liquidity.

Which of the statements given above is/are correct?

  1. 1 onlyAnswer
  2. B
    1 and 2 only
  3. C
    1 and 3 only
  4. D
    1, 2 and 3

Answer

Only statement 1 is correct.
The statement specifying that WPI excludes services while CPI Combined includes both goods and services is accurate. WPI measures wholesale price changes of physical goods, whereas CPI Combined accounts for retail prices paid by end consumers, including key service sectors. The claim regarding food weightage is false because food accounts for nearly 46% of CPI Combined, compared to around 24% in WPI. The claim regarding CRR is also false because raising CRR absorbs liquidity from commercial banks rather than expanding it.

Step-by-Step Solution

1
Evaluate Statement 1 regarding coverage of services in WPI versus CPI.
Statement 1 is correct.
WPI tracks bulk transaction prices of tangible manufactured, primary, and fuel goods and completely excludes services. CPI Combined captures retail consumption and incorporates services like housing, medical care, and transport.
2
Evaluate Statement 2 regarding food group weightage in CPI vs WPI.
Statement 2 is incorrect.
Food & Beverages constitute approximately 45.86% of the CPI Combined basket to reflect household expenditure patterns. In contrast, the food group in WPI (Food Articles under Primary Articles + Food Products under Manufactured Products) accounts for around 24.38% of the total basket.
3
Evaluate Statement 3 regarding the monetary transmission of Cash Reserve Ratio (CRR).
Statement 3 is incorrect.
The Cash Reserve Ratio (CRR) is the specified percentage of Net Demand and Time Liabilities (NDTL) that banks must keep as cash reserves with the RBI. Raising the CRR locks up more funds with the central bank, diminishing banks' loanable resources and tightening market liquidity.

Key Concept

Structural differences between CPI and WPI (service inclusion and basket weightages) and the liquidity impact of quantitative monetary instruments like CRR.
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Topics

Inflation Types, Price Indices (CPI, WPI), and Price Control Mechanisms