Which Index is used by RBI to decide repo rate and measure Inflation?

The correct answer is option 1,  i.e., CPI

• The Wholesale Price Index (WPI) was the main index for measurement of inflation in India till April 2014 when RBI adopted a new Consumer Price Index (CPI) (combined) as the key measure of inflation.
• The CPI calculates the difference in the price of commodities and services such as food, medical care, education, electronics, etc, which Indian consumers buy for use.
• Inflation refers to the rise in the prices of most goods and services of daily or common use, such as food, clothing, housing, recreation, transport, consumer staples, etc. Inflation measures the average price change in a basket of commodities and services over time.
• The opposite and rare fall in the price index of this basket of items is called ‘deflation’. Inflation is indicative of the decrease in the purchasing power of a unit of a country’s currency. This is measured in percentages.
• These are some of the chief reasons for the increase in prices:
  • High demand and low production or supply of multiple commodities create a demand-supply gap, which leads to a hike in prices.
  • Excess circulation of money leads to inflation as money loses its purchasing power.
  • With people having more money, they also tend to spend more, which causes increased demand.