Define core inflation and explain why the RBI watches it closely under the flexible inflation targeting framework.
Subtopic: Economy · Monetary policy
How to structure your answer
Introduction: Core CPI excludes food and fuel; RBI Monetary Policy Report April 2025 placed core inflation at ~3.5% even as headline ranged 4-5%.
Body: 1) Definition — non-food non-fuel CPI; better gauge of underlying demand. 2) Use — MPC anchors expectations on core trajectory; food shocks treated as supply-side. 3) Limits — large food weight (45.9%) in CPI Combined dilutes core signal.
Way forward: Periodic CPI base revision (NSO has begun 2024 base review); supply-side coordination with Ministry of Consumer Affairs on tomato-onion-pulse chains.
Written within the word limit
135 words · target 150 words · 9 min
Introduction: RBI's Monetary Policy Report April 2026 places India's CPI core inflation (excluding food and fuel) at 4.1% against headline CPI of 4.9%, underscoring the divergence the flexible-inflation-targeting framework must navigate.
Body: Core inflation strips out volatile food (45.9% CPI weight) and fuel-and-light (6.84%) to capture demand-driven prices. The Urjit Patel Committee (2014) framework treats CPI ex-food-fuel as the preferred measure. RBI watches core for three reasons: (i) it signals demand-pull inflation and the output gap; (ii) it indicates monetary-transmission success since the repo rate operates through demand; (iii) it anchors inflation expectations under Section 45ZB of the RBI Act 1934. Food-inflation pass-through into core has weakened to 0.16 (RBI Bulletin 2024), but sustained food shocks can de-anchor expectations, needing fiscal-monetary coordination via the PSF.
Way forward: RBI's Monetary Policy Department should publish a sectoral core-CPI dashboard quarterly by FY27 to sharpen forward guidance.
What an examiner expects to see
- Core CPI = headline minus food and fuel
- RBI MPR April 2025 — core ~3.5%
- Food and beverages 45.9% of CPI Combined
- MPC inflation target 4% ± 2% (Section 45ZA)
- CPI base year 2012 — revision under review
- Sticky vs flexible inflation components
Concrete cases, schemes and judgments
- Tomato spike July 2023
- Onion export ban 2023
- Russia-Ukraine fuel shock 2022
- MPC Oct 2024 stance shift to neutral