Which one of the following indices is now used by the Reserve Bank of India as the key measure for tracking the rate of inflation in India?

Introduction / Context:
Measuring inflation accurately is crucial for effective monetary policy. The Reserve Bank of India (RBI) needs a reliable price index to set interest rates, monitor price stability, and communicate its policy stance. Over time, the preferred index for inflation targeting has evolved. This question asks which index is currently used by the RBI as the primary measure when it tracks and targets inflation in India under its flexible inflation targeting framework.

Given Data / Assumptions:

• Four indices are listed: NASDAQ Index, BSE Index, Consumer Price Index (CPI), and Wholesale Price Index (WPI).
• We are concerned with the index used by the RBI specifically for measuring inflation.
• We assume standard definitions of stock market indices and price indices.
• We also assume knowledge of India's formal inflation targeting framework, which uses a specific measure of CPI inflation.

Concept / Approach:
The NASDAQ Index and the BSE Index are stock market indices that track the performance of selected groups of shares; they are not price indices for goods and services and therefore are not used as inflation measures. The Wholesale Price Index historically played a role in analysing price trends in India, but in recent years the RBI has adopted the Consumer Price Index as the primary anchor for its inflation targeting. Specifically, the RBI and the Government of India agreed on a flexible inflation targeting framework that focuses on headline CPI inflation as the formal target. Therefore, the correct index for this question is the Consumer Price Index.

Step-by-Step Solution:
Step 1: Eliminate NASDAQ Index, which is a United States stock market index and has no direct role in Indian inflation measurement.Step 2: Eliminate BSE Index, which measures share prices of selected companies on the Bombay Stock Exchange and is not a consumer price index.Step 3: Consider Wholesale Price Index, which measures prices of goods at the wholesale level and was historically used for some inflation analysis.Step 4: Recognise that under the formal inflation targeting framework adopted in India, the RBI uses headline Consumer Price Index inflation as the main target variable.Step 5: Therefore, the index now used by the RBI to measure and target inflation is the Consumer Price Index.

Verification / Alternative check:
Policy documents, agreements between the Government of India and the Reserve Bank of India, and monetary policy reports explicitly refer to a target range for CPI inflation, typically set as a percentage band around a central value. The Monetary Policy Committee is tasked with keeping CPI inflation within this band. Stock market indices such as NASDAQ and BSE are discussed in the context of financial markets, while WPI continues to be used for some analytical purposes but is not the main target for monetary policy. These facts confirm that CPI is the correct answer.

Why Other Options Are Wrong:
NASDAQ Index is wrong because it is a foreign stock market index and has nothing to do with measuring India's domestic inflation. BSE Index is incorrect because it reflects changes in share prices, not prices of goods and services consumed by households. Wholesale Price Index, while useful, is not the main indicator used for inflation targeting under the current framework. Thus, only the Consumer Price Index matches the role required in the question.

Common Pitfalls:
Some candidates remember that WPI was widely cited in earlier years and may mistakenly believe it is still the main policy index, overlooking the shift towards CPI in formal inflation targeting. Another pitfall is to confuse stock market performance with inflation; although rising share prices can reflect expectations, they do not directly measure the cost of living. To avoid such errors, remember that inflation targeting in India is explicitly based on Consumer Price Index inflation as the benchmark measure.

Final Answer:
The index now used by the Reserve Bank of India to measure the rate of inflation is the Consumer Price Index.