The Monetary Policy Committee (MPC) has decided to conduct an off-cycle meeting today to discuss the failure to meet the inflation target under Section 45ZN of the Reserve Bank of India Act, 1934. As per the Reserve Bank of India Act (RBI), 1934, MPC is required to meet at least four times each year, to discuss the macroeconomic issues in the country, and take policy decisions to address those. This is the second time MPC has conducted an off-cycle meeting in 2022-23. The meeting is scheduled in light of inflation being consistently high for nine consecutive months.

In this blog, we discuss what the inflation targeting framework is, examine retail and wholesale prices, and the divergence between them.   

What is the inflation targeting framework, and what happens if inflation is persistently high?

In 2016, Parliament amended the RBI Act, 1934 to change the monetary policy, and introduce an inflation targeting framework. This framework prioritises price stability to achieve sustainable GDP growth. Price stability allows investors to confidently invest their money for productive activities, without worrying about it losing value. Price stability also maintains the purchasing power of consumers, i.e., the ability to purchase a good (or service) with a given amount of money.

As per the new framework, the central government, in consultation with RBI sets: (i) an inflation target, and (ii) an upper and lower tolerance level for retail inflation. The target has been set at 4%, with an upper tolerance limit of 6% and a lower tolerance limit of 2%. The upper and lower limits indicate that although it is desirable for inflation to be close to 4%, deviation between these limits is acceptable. The target and bands are revised every five years. In March 2021, the existing targets were carried forward.  

Retail inflation has been above 6% for the past nine months, and it has been above 4% from October 2019 onwards (See Figure 1).

Figure 1: Consumer price index (year-on-year; in percentage)


Sources: Database on Indian Economy, Reserve Bank of India; PRS.

If inflation is above or below the prescribed limits for three quarters, RBI must submit a report to the central government explaining why prices have been rising (or falling) persistently, what will be done to correct that, and an estimate as to when the target will be achieved.   

The MPC uses tools such as interest rates to control the level of inflation in the economy. One such rate is the policy repo rate, which is the rate at which RBI lends money to banks. An increase in the policy repo rate makes borrowing money more costly, and hence is expected to control inflation by reducing the money supply. MPC increased this rate from 4% in April 2022 to 4.4% in May 2022, to 4.9% in June 2022, to 5.4% in August 2022, and to 5.9% in September 2022.

Breaking down the Consumer Price Index and the Wholesale Price Index

Consumer Price Index (CPI) measures the general prices of goods and services such as food, clothing, and fuel over time. Retail inflation is calculated as the change in the CPI over a period of time. Goods and services such as petrol, food products, health, and education are considered for its calculation, which are assigned different weights (See Table 1). Between February 2022 and August 2022, the average annual inflation was 6.9%. The rise in prices of subcomponents of the CPI during this period is indicated in Table 2.

Table 1: Assigned weights for the calculation of CPI



Food and beverages


Miscellaneous (including petrol and diesel, health, and education)




Clothing and footwear


Fuel and light


Pan, tobacco, and intoxications




Sources: MOSPI; PRS.

Table 2: Average inflation of some CPI components
between February 2022 to August 2022 (in percentage)

Subcategory of CPI

Average inflation



Oils and fats




Fuel and Light


Transport and communication


Cereals and products


Sources: Database on Indian Economy, RBI; PRS.

CPI is not the only index that measures inflation in an economy. The Wholesale Price Index (WPI) measures the wholesale prices of goods. A change in wholesale prices reflects wholesale inflation. Table 3 indicates the weights assigned to goods for calculating the WPI. Manufactured goods include metals, chemicals, food products, and textiles.   

Primary articles (23%) include food articles, and crude petroleum and natural gas. Fuel and power (12%) include mineral oils, electricity, and coal.  WPI has remained above 10% from April 2021 onwards. It reached an all-time high of 17% in May 2022. This was driven by the inflation in metals, kerosene and petroleum coke, fruits and vegetables, and palm oil.

Table 3:Assigned weights for the
calculation of WPI (in percentage)



Manufactured products


Primary articles


Fuel and power


All commodities


Sources: Ministry of Commerce and Industry; PRS.

Why has WPI inflation been consistently above CPI inflation?

Movements in the WPI have an impact on the CPI.  For almost a year and half, CPI inflation has remained below WPI inflation.  However, as per the design of the indices, it is expected that CPI would remain above WPI, and that any increase in WPI would reflect in the CPI after a time lag.  This is because retail prices include taxes (as a percentage of price), while wholesale prices do not.  Additionally, some of the goods in WPI act as inputs in the goods considered in CPI.  An increase in input prices would lead to higher retail prices after a time lag.

We discuss possible reasons for why CPI has remained below WPI for a year and a half.

Figure 2: Consumer Price Index and Wholesale Price Index


Sources: Database on Indian Economy, Reserve Bank of India; PRS.

Composition of indices

As indicated in Table 2 and 3, the composition of the two indices varies. For instance, prices of manufacture of basic metals, chemicals, and machinery grew at an average rate of 13% between February 2021 and September 2022.  They contribute 7% to the WPI. These are input goods for producing final goods and services such as automobiles, which are included in the CPI. The rise in prices of transport vehicles, communication devices, fuel for transport, and housing (CPI components) rose by 6% during this period.

The Ministry of Finance has observed that wholesale prices did not feed into retail prices (from March 2021 onwards) as wholesalers absorbed the rising input costs and did not pass them on to retailers. In August 2022, it noted that as retail prices are rising now, the pass-through may occur.

Mr. Vaghul, our first Chairperson, passed away on Saturday.  I write this note to express my deep gratitude to him, and to celebrate his life.  And what a life he lived!

Mr. Vaghul and I at his residence








Our past and present Chairpersons,
Mr. Vaghul and Mr. Ramadorai

Industry stalwarts have spoken about his contributions to the financial sector, his mentorship of people and institutions across finance, industry and non-profits.  I don’t want to repeat that (though I was a beneficiary as a young professional starting my career at ICICI Securities).  I want to note here some of the ways he helped shape PRS.

Mr Vaghul was our first chairman, from 2012 to 2018.  When he joined the board, we were in deep financial crisis.  Our FCRA application had been turned down (I still don’t know the reason), and we were trying to survive on monthly fund raise.  Mr Vaghul advised us to raise funds from domestic philanthropists.  “PRS works to make Indian democracy more effective.  We should not rely on foreigners to do this.”.  He was sure that Indian philanthropists would fund us.  “We’ll try our best.  But if it doesn’t work, we may shut down.  Are you okay with that?”  Of course, with him calling up people, we survived the crisis.

He also suggested that we should have an independent board without any representation from funders.  The output should be completely independent of funders’ interest given that we were working in the policy space.  We have stuck to this advice.

Even when he was 80, he could read faster than anyone and remember everything.  I once said something in a board meeting which had been written in the note sent earlier.  “We have all read the note.  Let us discuss the implications.”  And he could think three steps ahead of everyone else.

He had a light touch as a chairman.  When I asked for management advice, he would ask me to solve the problem on my own.  He saw his role as guiding the larger strategy, help raise funds and ensure that the organisation had a strong value system.  Indeed, he was the original Karmayogi – I have an email from him which says, “Continue with the good work.  We should neither be euphoric with appreciation or distracted by criticism.” And another, "Those who adhere to the truth need not be afraid of the consequences".

The best part about board meetings was the chat afterwards.  He would have us in splits with stories from his experience.  Some of these are in his memoirs, but we heard a few juicier ones too!

Even after he retired from our Board, he was always available to meet.  I just needed to message him whenever I was in Madras, and he would ask me to come home.  And Mrs. Vaghul was a welcoming host.  Filter coffee, great advice, juicy stories, what more could one ask for?

Goodbye Mr. Vaghul.  Your life lives on through the institutions you nurtured.  And hope that we live up to your standards.