Examkin

Question

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

With reference to inflation metrics, price indices, and liquidity control mechanisms in India, consider the following statements:

1. Core inflation excludes food and fuel/energy groups from headline inflation to capture underlying, long-term price dynamics.
2. The Consumer Price Indices for Industrial Workers (CPI-IW) and Agricultural Labourers (CPI-AL) are compiled and published monthly by the National Statistical Office (NSO).
3. An increase in the Statutory Liquidity Ratio (SLR) by the Reserve Bank of India increases the credit creation capacity of commercial banks, thereby intensifying demand-pull inflation.

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

1 only
The option stating '1 only' is correct because statement 1 accurately defines core inflation by excluding volatile food and fuel components. Statement 2 wrongly attributes CPI-IW and CPI-AL compilation to the NSO instead of the Labour Bureau. Statement 3 incorrectly claims an increased SLR expands bank lending capacity, whereas raising SLR actually impounds bank liquidity to contract credit and lower demand-pull inflation.

Step-by-Step Solution

1
Evaluate Statement 1 regarding Core Inflation
Statement 1 is CORRECT.
Core inflation is calculated by stripping away transient and volatile components—specifically food and fuel/energy items—from Headline Inflation. This provides monetary authorities with a clearer picture of underlying price stability and demand trends.
2
Evaluate Statement 2 regarding CPI Releasing Agencies
Statement 2 is INCORRECT.
The National Statistical Office (NSO) under MoSPI compiles CPI (Rural, Urban, Combined). However, sector-specific consumer price indices such as CPI for Industrial Workers (CPI-IW), CPI for Agricultural Labourers (CPI-AL), and CPI for Rural Labourers (CPI-RL) are compiled and released by the Labour Bureau (an attached office of the Ministry of Labour and Employment).
3
Evaluate Statement 3 regarding SLR and Liquidity Control
Statement 3 is INCORRECT.
Statutory Liquidity Ratio (SLR) is a quantitative monetary tool. When the RBI increases the SLR, commercial banks must maintain a larger proportion of Net Demand and Time Liabilities (NDTL) in safe liquid assets (like government securities). This reduces the available lendable surplus with banks, contracting money supply and suppressing demand-pull inflation, rather than expanding credit.

Key Concept

Inflation Dynamics, Specific CPI Publishing Agencies, and Quantitative Monetary Transmission
Rate this question

Topics

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