Current Economic Affairs

Current Economic Affairs

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Key Definition (1 sentence)

Current economic affairs refers to the latest macroeconomic developments — RBI’s monetary policy decisions, Union Budget allocations, inflation trends, and banking sector reforms — that shape India’s economic trajectory in real time.

Why It Matters for RBI

RBI Grade B officers must understand the pulse of the economy; questions in Phase 2 directly test your ability to connect current policy announcements to theoretical concepts like inflation targeting, fiscal consolidation, and financial inclusion.

Must Know Facts

• RBI’s MPC (Monetary Policy Committee) meets 6 times a year; the repo rate has been held at 6.5% since February 2023 as of early 2025, signalling a wait-and-see stance
• Union Budget 2025-26 targets fiscal deficit at 4.8% of GDP (down from 5.1% in FY25), with capex outlay of ₹11.2 lakh crore
• GST collections crossed ₹1.87 lakh crore in December 2024 — the 20th consecutive month above ₹1.5 lakh crore
• RBI projects India’s GDP growth at 6.5% for FY25; inflation is expected to moderate to 4.5% by end-2025
• Digital Rupee (e-₹) pilot now covers 17 banks and 5 lakh users for wholesale and retail use cases

Quick Example / Application

When the Finance Minister announced in Budget 2025-26 that the fiscal deficit would be brought down to 4.8%, bond yields softened (10-year G-sec fell by 8 basis points) because lower deficits mean less government borrowing — a classic link between fiscal and monetary policy.

1-Line Summary

Staying current with RBI’s policy moves, Budget announcements, and macroeconomic data is not optional for Grade B — it is the exam.

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Concept Explanation

Here’s what you need to understand before diving into specific policies: RBI Grade B Phase 2 doesn’t test whether you memorised economic theories. It tests whether you can connect what’s happening right now in the economy to the theory you’ve studied. So when the exam asks about current economic affairs, it wants you to demonstrate exactly this: policy → data → impact chain.

Let’s start with RBI’s Monetary Policy Committee (MPC). The MPC was constituted in 2016 under the RBI Act, with the explicit goal of inflation targeting. It has six members — three RBI officials and three external members appointed by the government. It meets six times a year (approximately every two months) and decides on the repo rate — the rate at which RBI lends to commercial banks. The inflation target is 4% (±2% tolerance band, so 2-6% is the comfort zone). The MPC uses a bi-monthly policy cycle (as opposed to the old system where RBI Governor announced policy whenever needed).

As of the February 2025 MPC meeting, the repo rate has been held at 6.5% — unchanged since February 2023. This was a deliberate “higher for longer” stance designed to bring inflation sustainably to 4%. Why hasn’t RBI cut rates despite pressure? Because food inflation (especially vegetables, pulses) has been stubborn, and RBI wants credible evidence of inflation cooling before easing. The Governor’s statement after each MPC meeting is a masterclass in communication — reading those statements carefully is the single best preparation for this section of the exam.

Inflation trajectory: India uses Consumer Price Index (CPI) combined as its inflation measure. Headline CPI inflation was 5.1% in December 2024, above the 4% target but within the tolerance band. Core inflation (CPI excluding food and fuel) has been more persistent, hovering around 3.8-4.2%. The MPC’s job is to look through temporary food price shocks while ensuring they don’t become embedded in inflation expectations. The RBI Act actually has a flexible inflation targeting (FIT) framework — RBI is not mechanically required to hit 4% every quarter, but must endeavour to do so over the medium term while considering growth.

Now, the Union Budget 2025-26 was presented by Finance Minister Nirmala Sitharaman on February 1, 2025. Key highlights:

• Fiscal deficit target: 4.8% of GDP (down from 5.1% in FY25 RE) — this is the fiscal consolidation roadmap India is committed to
• Capital expenditure (capex): ₹11.2 lakh crore — the government is deliberately spending big on infrastructure to crowd in private investment (this is classic Keynesian countercyclical policy)
• Gross tax revenue estimated at ₹38.65 lakh crore; net tax to states via devolution: ₹47.66 lakh crore
• PM SVANidhi (micro-credit for street vendors) extended; PM-KISAN income support of ₹6,000/year continued
• 54% of Budget spending goes to states via devolution and centrally sponsored schemes — a federalism story

GST collections have been a bright spot: monthly GST collections have been above ₹1.87 lakh crore consistently since mid-2024, crossing ₹2.10 lakh crore in April 2024. The 20th consecutive month above ₹1.5 lakh crore. This is significant because GST is the most visible indicator of economic activity — when people are consuming, GST collections rise.

GDP growth: RBI projects 6.5% GDP growth for FY25, making India the fastest-growing large economy (China is growing at ~4.5%). India’s growth is driven by domestic consumption, infrastructure capex, and a resilient services sector. The International Monetary Fund (IMF) has also projected India at 6.5% for 2024-25.

Banking reforms: RBI has been pushing for digital lending standards — the Reserve Bank of India (Digital Lending – Data Handling) Directions, 2024 came into effect to protect borrowers from rogue lending apps. RBI also raised promoter contribution norms for bank board resolutions to strengthen governance. The Reserve Bank of India – Integrated Ombudsman Scheme 2021 has been upgraded to handle complaints faster.

The Digital Rupee (e-₹) is RBI’s central bank digital currency (CBDC) initiative. As of early 2025, the e-₹ pilot covers 17 banks for wholesale use (intended for interbank settlements and government securities) and 11 banks for retail use in select cities. Over 5 lakh users have transacted using e-₹. RBI’s stated objectives: reduce cost of money printing and distribution, enable direct government transfers, and improve monetary policy transmission. The challenge? Private digital payment systems (UPI, wallets) are already extremely efficient in India — finding the niche for CBDC is the ongoing work.

Key Terms & Definitions

Term	Definition
MPC	Monetary Policy Committee — 6-member RBI body that sets the repo rate; meets 6 times a year
Repo Rate	The rate at which RBI lends short-term money to commercial banks against government securities
Fiscal Deficit	Government’s total expenditure minus total receipts excluding borrowings; expressed as % of GDP
GST	Goods and Services Tax — comprehensive indirect tax replaced multiple indirect taxes since July 2017
Capex	Capital Expenditure — government spending on infrastructure, assets with long-term economic value
Core Inflation	CPI inflation excluding food and fuel components; signals underlying demand pressure
e-₹	Digital Rupee — India’s central bank digital currency (CBDC) launched in pilot stages since 2022
FIT	Flexible Inflation Targeting — RBI’s framework balancing inflation control with growth considerations
CRR	Cash Reserve Ratio — percentage of deposits banks must keep with RBI as reserves (currently 4.5%)
SLR	Statutory Liquidity Ratio — percentage of deposits banks must invest in government securities (currently 18%)

Real-World Example (RBI Context)

When the February 2025 MPC held the repo rate at 6.5% for the 10th consecutive time, the Governor’s statement said the decision was “guided by the evolving growth-inflation dynamics.” Bond markets reacted — the 10-year G-sec yield softened by 3 basis points. The same day, UPI transaction values hit a record ₹21 lakh crore in January 2025. These two data points tell a complete story: rate stability on one hand, digital payments momentum on the other — the exam loves asking you to connect such dots.

Exam Pattern / How It Appears

• Conceptual: Why does RBI use CPI (not WPI) as its inflation target? What is flexible inflation targeting?
• Numerical: Calculate fiscal deficit as % of GDP from given Budget figures; compute real interest rate from nominal rate and inflation
• Case-based: MPC statement excerpts → predict the likely monetary policy direction
• Current: Which GST slab covers restaurant services? What is the current repo rate? (Keep these current facts on your fingertips)

Step-by-Step Example

Q: The Union Budget shows total receipts (excluding borrowings) of ₹30.6 lakh crore and total expenditure of ₹50.6 lakh crore. Calculate the fiscal deficit as a percentage of GDP, given that GDP is ₹200 lakh crore.

Answer: Fiscal Deficit = Total Expenditure − Total Receipts = ₹50.6 lakh crore − ₹30.6 lakh crore = ₹20 lakh crore Fiscal Deficit as % of GDP = (₹20 lakh crore / ₹200 lakh crore) × 100 = 10% Note: India’s actual fiscal deficits are lower because government also gets disinvestment receipts and Recovery of loans. The primary deficit (excluding interest payments) is another commonly asked metric. For FY25 BE, fiscal deficit was 5.1% of GDP.

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Concept Deep Dive

“Current economic affairs” for an RBI Grade B officer is not about memorising news — it’s about developing the analytical muscle to connect today’s data releases to yesterday’s policy decisions and tomorrow’s likely outcomes. Let me build this for you systematically.

RBI’s Monetary Policy Framework: Where we are today

The RBI Act, 1934 was amended in 2016 to formalise Flexible Inflation Targeting (FIT) as India’s monetary framework. The Governor of RBI (Shaktikanta Das as of 2024-2025) chairs the MPC, which has three RBI members and three external members. The external members are appointed by a selection committee (after the 2022 MPC transparency reforms, their names and votes are published).

The repo rate is the policy rate — the rate at which RBI lends to commercial banks against government securities in the repo market. By lowering the repo rate, RBI makes borrowing cheaper (encouraging investment/consumption); by raising it, RBI makes borrowing expensive (cooling demand/inflation). The transmission mechanism: repo rate → banks’ marginal cost of funds → lending rates (MCLR, EBLR) → borrower costs → spending/investment decisions → inflation and growth.

As of the February 2025 MPC review:

• Repo rate: 6.5% (unchanged since February 2023)
• Standing Deposit Facility (SDF) rate: 6.25% (floor of the corridor — banks earn this on overnight surplus deposits with RBI)
• Marginal Standing Facility (MSF) rate: 6.75% (ceiling — banks can borrow at this rate from RBI against SLR securities)

The inflation trajectory tells the story of why rates have been held at 6.5% for two years:

• FY24 headline CPI averaged 5.4% (above the 4% target)
• Food inflation was the villain — vegetables (+15-20% in Q3 FY24), pulses (+10%), spices (+8%)
• Core inflation (ex-food, ex-fuel) remained sticky at 3.8-4.1%
• RBI’s CPI forecast for FY25: 4.5% (expected to converge to target by Q4 FY25)

The MPC’s wait-and-see stance is not passivity — it’s a calibrated response. Every MPC statement emphasises “policy vigil” — watching for demand-pull inflation to re-emerge as the economy grows faster, while acknowledging supply shocks (food prices) that are temporary but can become permanent if they feed into wage demands.

Union Budget 2025-26 — The fiscal consolidation story

Finance Minister Nirmala Sitharaman presented the Union Budget for FY26 (2025-26) on February 1, 2025. This budget is remarkable for its commitment to fiscal consolidation without cutting welfare expenditure — a difficult balancing act.

Fiscal deficit: The budget pegged fiscal deficit for FY26 at 4.8% of GDP, down from the revised estimate of 5.1% for FY25. This follows a decade-long roadmap: India committed to the FRBM (Fiscal Responsibility and Budget Management) Act target of 3% fiscal deficit, but the pandemic pushed it to 9.2% in FY21. The glide path back to respectability is:

• FY22: 6.7%
• FY23: 5.8%
• FY24: 5.6%
• FY25 RE: 5.1%
• FY26 BE: 4.8%
• Target: 4.5% by FY27

Why fiscal deficit matters for RBI: Government borrowing to finance the deficit is the largest component of India’s bond market. When the government borrows ₹20 lakh crore a year (as it does), it crowds out private borrowers who also want bank credit. RBI manages this through its open market operations (OMO) — buying government bonds to inject liquidity and keep yields in check. A credible fiscal consolidation path reduces the supply of government bonds, which supports bond prices, lowers yields, and eases monetary policy transmission.

Capital expenditure: At ₹11.2 lakh crore, capex is the headline number. This represents 3.4% of GDP and is 17% higher than FY25 RE. The logic: government infrastructure spending has high fiscal multipliers (estimated 1.5-2.5 by RBI’s research department). PM Gati Shakti (the multi-modal connectivity project) channels this capex into projects with clear logistics efficiency gains. This is the crowding-in hypothesis: government investment → improves logistics → lowers cost of doing business → private investment follows.

Tax revenue story: GST collections are a barometer of economic health:

• ₹1.87 lakh crore in December 2024 (20th consecutive month above ₹1.5 lakh crore)
• Record ₹2.10 lakh crore in April 2024
• GST compensation cess collected: ₹1 lakh crore+ — this is used to compensate states for revenue loss during the GST transition period

Gross tax revenue for FY26 is estimated at ₹38.65 lakh crore — up 10.4% from FY25 RE. This reflects both economic growth (more incomes and consumption to tax) and better compliance (GSTN infrastructure, e-invoicing, analytics-driven scrutiny).

Banking sector reforms and the NPA story:

The story of Indian banking reform since 2015 has two chapters: cleaning up the legacy NPA mess, and building a more resilient banking system.

NPA resolution: Gross NPAs of scheduled commercial banks peaked at 11.5% (September 2018) — the infamous twin balance sheet problem (overleveraged companies + stressed banks). The Insolvency and Bankruptcy Code (IBC) was the primary tool — RBI forced banks to refer stressed accounts above ₹2,000 crore to IBC in 2017. By March 2024, gross NPAs had fallen to 3.0% — a remarkable clean-up.

Capital adequacy: Public sector banks (PSBs) received ₹2.11 lakh crore in recapitalisation since 2017 — a massive government intervention to shore up bank balance sheets. By March 2024, all PSBs met the Basel III capital requirements comfortably.

Digital lending reforms: The RBI (Digital Lending – Data Handling) Directions, 2024, effective January 2025, mandate:

• All loan disbursements and repayments must be executed directly between the borrower’s bank account and the lending platform
• No third-party involvement in fund flows — this kills predatory lending apps that collected principal from investors and then disbursed loans to borrowers with massive markups
• Data storage: Lending service providers must store all data with the borrower on RBI-approved infrastructure
• Fair lending code: Digital lending apps must display all-inclusive cost of credit (no hidden charges)

Digital Rupee (e-₹) — CBDC development:

India’s Central Bank Digital Currency, the e-₹, is being piloted in both wholesale and retail segments:

• Wholesale (11 banks): e-₹ for interbank settlements, government securities transactions (primary market subscriptions, secondary market trades)
• Retail (11 banks in 5 cities): Person-to-person (P2P) and person-to-merchant (P2M) transactions in selected locations

As of January 2025, over 5 lakh users have transacted using e-₹. Transaction volumes have been modest — UPI processes 14+ billion transactions per year (~$2 trillion value) vs. e-₹ in the hundreds of millions. The challenge: UPI is already extremely efficient and free for consumers; the e-₹‘s proposition is primarily for governments (programmable money, direct benefit transfers without bank intermediation) and financial institutions (cheaper interbank settlements).

RBI’s long-term e-₹ vision:

1. Cross-border payments: Eventually link e-₹ with CBDCs of other countries (BIS Project mBridge is exploring this) for cheaper, faster cross-border remittances
2. Programmability: RBI could programme e-₹ to expire (to incentivise spending), be restricted to certain merchants (subsidised loans), or carry attached conditions (like PM-KISAN benefits)
3. Financial inclusion: Those without bank accounts could hold e-₹ wallets — but this raises KYC and AML concerns

Advanced Analysis

The fiscal-monetary policy interaction — the most tested concept:

Fiscal policy and monetary policy interact through three primary channels:

Channel 1: Bond yields and borrowing costs Higher fiscal deficit → government borrows more → bond supply increases → yields rise (bond prices fall) → banks demand higher yields on loans → private investment gets costlier. This is crowding out. RBI can partially offset this by buying bonds (OMO) to inject liquidity, but this conflicts with inflation management.

Channel 2: Inflation and the inflation tax Large fiscal deficits financed by RBI (printing money — called seigniorage) would be inflationary. India has not done this since the 1990s (the Jalan Committee report on RBI’s surplus transfer dealt with this). But the perception matters: if markets believe the government is financing itself by asking RBI to print, inflation expectations de-anchor and RBI’s credibility costs increase.

Channel 3: Currency and trade Large fiscal deficits can weaken the rupee (as foreign investors worry about debt sustainability and sell rupee bonds). A weaker rupee makes imports costlier (especially crude oil — India’s biggest import), feeding into inflation. This creates a vicious cycle: fiscal deficit → rupee weakness → imported inflation → RBI raises rates → growth slows.

This is why the FRBM Act’s fiscal deficit targets are not just accounting — they are a signal to markets that India manages its finances responsibly, keeping the vicious cycle at bay.

GDP growth — India vs. the world:

India’s 6.5% projected growth for FY25 makes it the fastest-growing large economy:

• China: ~4.5%
• USA: ~2.8%
• Eurozone: ~0.8%
• Brazil: ~2.2%
• Global average: ~3.2%

This growth is powered by:

1. Demographic dividend: 65% of India’s 1.44 billion population is under 35 — a large working-age population with rising aspirations
2. Digital economy: UPI processed $2 trillion in transactions in FY24 — India is one of the world’s most digital payment-intensive economies
3. PLI-driven manufacturing: Mobile phones, electronics, and semiconductors manufacturing growing at 20%+ CAGR
4. Infrastructure capex: Government investment in roads, railways, ports, and airports is improving logistics costs
5. Services superpower: IT-BPM sector at $250 billion, financial services growing rapidly

RBI-Specific Coverage

RBI’s MPC statements are the single most important current affairs document for Grade B preparation. Each statement has:

• conomic overview: Growth and inflation assessment
• Voting pattern: Each MPC member’s vote on rate decision (published)
• Minutes of meetings: Detailed reasoning behind each member’s position
• Forward guidance: Language like “remain watchful,” “data-dependent,” “calibrated” — each word is parsed by markets

What the examiner wants: understand that RBI doesn’t operate in a vacuum — it coordinates with the Finance Ministry (though operationally independent), with the Bank for International Settlements (BIS), and with other central banks via the Financial Stability Board (FSB). The RBIAct 1934 Section 45Z gives RBI authority over payment systems, which is increasingly relevant as digital money evolves.

Case Study / Application

Case: How RBI managed the 2022 rupee crisis and what it teaches

In 2022, as the US Fed raised rates aggressively (from 0.25% to 4.5% in 12 months), capital flowed from emerging markets to the US, putting enormous pressure on the rupee. The rupee depreciated from ₹74/$ to a lifetime low of ₹83/$ in October 2022.

RBI’s response toolkit:

1. Dovished FX reserves: RBI sold dollars from its $642 billion reserves (down to $524 billion by Oct 2022) — this is not panic selling but calibrated intervention to prevent disorderly markets
2. Interest rate differential: RBI raised the repo rate by 225 basis points in 2022 (from 4% to 6.25%) — this narrowed the interest rate differential with the US, reducing the capital outflow incentive
3. FEMA adjustments: RBI allowed exporters to retain 100% of foreign exchange earnings (vs. mandatory surrender requirements), increasing dollar supply
4. CCIL (Clearing Corporation of India Ltd): Used as a backstop for dollar liquidity

The lesson: RBI’s forex reserves are not just numbers — they are a strategic asset that buys policy credibility and time during global shocks. The 2022 episode showed India’s reserves ($524B minimum in 2022) were sufficient despite the drawdown. By December 2024, reserves recovered to $630 billion.

GATE-Level Numerical

Q: The following data is from RBI’s MPC statement and the Union Budget (all figures approximate):

Parameter	Value
Repo Rate	6.5%
Inflation (CPI, latest)	5.1%
GDP Growth (projected)	6.5%
SLR	18.0%
CRR	4.5%
Fiscal Deficit (FY26 BE)	4.8% of GDP
Total Government Borrowing	₹20.3 lakh crore
RBI’s Policy Rate Corridor (SDF-MSF)	6.25% − 6.75%

(a) Calculate the real repo rate (repo rate minus inflation) and comment on whether it is positive or negative (b) If the government borrows ₹20.3 lakh crore and banks invest 18% of their deposits in SLR securities, and total bank deposits are ₹230 lakh crore, calculate how much of government borrowing is absorbed by banks through SLR requirement (c) The government’s total tax revenue is ₹38.65 lakh crore. If the fiscal deficit is 4.8% of GDP and GDP is ₹200 lakh crore, what is the government’s total expenditure? (d) What is the primary deficit if interest payments are ₹10.5 lakh crore?

Answers:

(a) Real Repo Rate = Nominal Repo Rate − Inflation = 6.5% − 5.1% = 1.4% The real rate is positive (+1.4%), meaning borrowing costs are positive in real terms. This is consistent with RBI’s inflation-targeting framework — a positive real rate means monetary policy is neither overly stimulative nor contractive.

(b) SLR absorption: Total bank deposits = ₹230 lakh crore SLR requirement = 18% of deposits = ₹230 lakh crore × 0.18 = ₹41.4 lakh crore

This means banks are required to hold ₹41.4 lakh crore in government securities (SLR). The government’s total borrowing is ₹20.3 lakh crore — which is less than what banks must hold under SLR. This means the entire government borrowing programme can potentially be absorbed by mandatory SLR holdings alone, before even considering other investors.

This is a major market stability factor: government bonds are always in demand because SLR mandates it.

(c) Total Government Expenditure: Fiscal Deficit = Expenditure − Revenue 4.8% of ₹200 lakh crore = ₹9.6 lakh crore (this is fiscal deficit) Total Expenditure = Revenue + Fiscal Deficit Revenue = ₹38.65 lakh crore (tax revenue; ignoring non-tax revenue for simplicity) Total Expenditure = ₹38.65 lakh crore + ₹9.6 lakh crore = ₹48.25 lakh crore (Actual total expenditure in Union Budget 2025-26 was ₹50.6 lakh crore, including non-tax revenue and other receipts — this simplified calc is for understanding the principle)

(d) Primary Deficit: Primary Deficit = Fiscal Deficit − Interest Payments = ₹9.6 lakh crore − ₹10.5 lakh crore = −₹0.9 lakh crore (i.e., a primary surplus of ₹0.9 lakh crore)

This means the government is running a primary surplus — meaning even before interest payments, the government’s primary expenditures are covered by revenue. The entire fiscal deficit is accounted for by interest payments — which means government is not borrowing to fund new spending, only to refinance past obligations. This is a significantly healthier position and is consistent with India’s fiscal consolidation trajectory.

Multiple Perspectives

• Academic view: Keynesian economists argue that India’s fiscal consolidation is too aggressive during a global slowdown — the government should run larger deficits to stimulate demand. Monetarists disagree — they argue that fiscal deficits crowd out private investment and that monetary policy should handle demand management. RBI’s FIT framework implicitly accepts a middle path: fiscal consolidation over time, while monetary policy handles cyclical demand.
• RBI/Regulatory view: RBI’s primary concern is inflation targeting — any fiscal policy that risks de-anchoring inflation expectations is a concern. RBI has publicly welcomed the fiscal consolidation path (stated in MPC minutes). RBI also monitors the government’s debt sustainability — the ratio of government debt to GDP, which has been declining from 84% (2020 peak) to ~81% (FY25 RE) and projected at ~78% (FY26 BE).
• Practical/Industry view: Industry wants lower repo rates to reduce borrowing costs. Banks want strong credit growth to deploy deposits profitably. The RBI-industry relationship is often tense: RBI’s regulatory tightening (digital lending norms, NPA recognition rules) is seen as necessary but burdensome by fintech companies. The digital rupee is viewed with cautious interest — if it can reduce payment gateway costs for merchants (currently 1-2% MDR), it would be widely adopted.

Recent Developments (2024-2026)

• RBI MPC meetings 2024-25: Repo rate held at 6.5% in February, April, June, August, October, December 2024 and February 2025 — “data-dependent, amorphous pause” is the policy stance
• UPI 2.0 / Credit on UPI: Launched — UPI now enables credit card linked payments through UPI, a major development for digital credit penetration in Tier 2/3 cities
• ₹20,000 crore infrastructure fund announced in Budget 2025-26 for 50-year interest-free loans to states for capital investment (a new fiscal instrument)
• RBI’s Basel III Capital Adequacy review: India’s largest banks (SBI, HDFC Bank) now meet all Basel III requirements ahead of the 2025 deadline
• Digital Rupee expansion: Budget 2025-26 announced pilot expansion of e-₹ to 20 more banks and 10 more cities; Finance Ministry set up a ₹1,000 crore Digital Rupee Innovation Fund
• Recapitalisation of PSBs: Budget 2025-26 allocated ₹2.5 lakh crore for PSU bank recapitalisation — ensuring banks can support the credit demands of a 6.5% GDP growth economy
• RBI’s New Monetary Policy Framework Agreement (2025): RBI and the government signed a revised Monetary Policy Agreement (replacing the 2016 agreement) — updated to account for multiple price indices, financial stability objectives, and supply-side inflation measurement improvements

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