Daily Static Quiz Prelims Practice 2027
Option (b) is correct — the GDP Deflator equals (Nominal GDP ÷ Real GDP) × 100, capturing economy-wide price level changes, with values above 100 indicating inflation relative to the base year. Option (a) is wrong — subtracting gives an absolute nominal increment with no standard meaning as a price index. Option (c) is wrong — it inverts the ratio, yielding a value below 100 in an inflationary environment, the reverse of a deflator. Option (d) is wrong — the CPI/WPI ratio has no standard definition as the GDP Deflator, an entirely different measure.
- The Monetary Policy Framework Agreement between the Government of India and the RBI was signed in February 2015, formally adopting CPI as the nominal anchor.
- The Monetary Policy Committee (MPC) consists of six members — three from the RBI and three appointed by the Government of India — with the RBI Governor holding a casting vote in case of a tie.
- If the MPC fails to meet the inflation target for two consecutive quarters, it is required to submit a report to the Central Government explaining the reasons and remedial actions.
- The current inflation target of 4% (±2%) is set under the RBI Act, 1934, and is reviewed every three years by the Government in consultation with the RBI.
Statements 1 and 2 are correct. The Monetary Policy Framework Agreement, signed 20 February 2015, formally adopted headline CPI as the nominal anchor, and the MPC has six members (3 RBI + 3 external) with the Governor holding a casting vote in a tie. Statement 3 is incorrect — the RBI Act requires an explanatory report if inflation stays outside the target band for three consecutive quarters, not two. Statement 4 is incorrect — the inflation target is reviewed once every five years, not three.
Option (b) is correct — core inflation strips out food and fuel from the headline CPI basket, since these are highly volatile due to seasonal and global factors, isolating the structural, demand-driven price pressures monetary policy can actually influence. Option (a) reverses the definition — core inflation excludes, not measures only, food and fuel. Option (c) is wrong — core inflation is measured within the CPI framework, not the WPI. Option (d) is wrong — core inflation covers all CPI components except food and fuel, including manufactured goods and housing, not services alone.
- The current WPI series in India uses 2011-12 as the base year.
- The WPI in India covers three major commodity groups — primary articles, fuel and power, and manufactured products — with manufactured products having the highest weight.
- The WPI captures services sector inflation, making it a more comprehensive indicator of economy-wide price pressures than the CPI.
- A sustained divergence between WPI and CPI — where WPI falls while CPI remains elevated — typically indicates supply-side deflationary pressure at the wholesale level not yet passed on to consumers, or that retail margins are widening.
Statements 1, 2 and 4 are correct. The current WPI series uses 2011-12 as base year, and comprises Primary Articles (~22.6%), Fuel & Power (~13.2%), and Manufactured Products (~64.2%, the dominant weight). A sustained WPI-CPI divergence with low/negative WPI alongside elevated CPI signals wholesale deflation not yet transmitted to retail consumers, due to wide margins, distribution inefficiencies, or food supply constraints. Statement 3 is incorrect — WPI does not capture services at all, covering only goods; this is a major limitation given services exceed 50% of India's GDP.
Reason (R): When the domestic currency depreciates against major trading currencies, the rupee cost of imported goods — particularly crude oil, edible oils, and capital goods — rises, increasing input costs for domestic producers and pushing up the general price level.
Both A and R are correct, and R explains A. Imported inflation is well-documented in import-dependent economies; India, importing roughly 85% of its crude oil plus significant edible oils, fertilisers, and electronics, is particularly vulnerable. Rupee depreciation directly raises the domestic price of every dollar/euro-denominated import — crude oil being the most significant channel — feeding into transport costs, power tariffs, and commodity prices across the supply chain, precisely explaining why currency depreciation generates inflation.
