"A Decade of Inflation Targeting: Does It Work in India?"
Inflation targeting
a monetary policy framework where the central bank commits to keeping inflation within a set numerical range
Repo rate
the interest rate at which the RBI lends short-term funds to commercial banks
India has just completed ten years of formal inflation targeting (meaning: a policy where the central bank commits to keeping inflation within a set range) as the RBI's monetary policy framework. This began with an amendment to the Reserve Bank of India Act, 1934 in 2016. Section 45ZA of the Act requires the central government and the RBI to jointly set an inflation target every five years. The first target fixed CPI inflation at 4%, with a tolerance band of plus or minus 2 percentage points, giving a healthy range of 2-6%. This was reviewed in 2021 and kept the same, and later extended up to March 2031.
The Monetary Policy Committee (MPC) is the body that sets the repo rate (meaning: the rate at which the RBI lends short-term funds to banks). It has six members: three from the RBI, including the Governor, and three external members named by the government. The Governor holds a casting vote if there is a tie. If inflation stays outside the 2-6% band for three consecutive quarters, the RBI must explain the failure in writing to the government, along with the steps it will take. This clause is meant to keep the framework accountable to elected government, even though the MPC itself is independent in its day-to-day decisions.
The RBI controls inflation through monetary policy tools. These include adjusting the repo rate, bank rate, and statutory liquidity ratio. The RBI also uses open market operations. Decreased money circulation reduces aggregate demand and helps control inflation. Increased money circulation has the opposite effect.
The RBI tries to control inflation mainly by changing how much money is moving through the economy. Basic monetary logic holds that reducing money supply relative to demand raises interest rates, which cools spending and slows price rises. A repo rate hike works through this same channel. It makes credit costlier for banks. Banks then raise their own lending rates. Costlier loans mean people and firms borrow and spend less. This eases demand-driven price pressure. A rate cut does the opposite. Cheaper credit boosts spending and investment.
The RBI also tries to shape the public's inflation expectations. …
With reference to inflation in India, which of the following statements is correct?
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1.Cut and optimize the Statutory Liquidity Ratio
2.Increase the Marginal Standing Facility Rate
3.Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
Consider the following statements about India's Monetary Policy Committee (MPC):
1.The MPC consists of six members, three from the RBI and three external members.
2.Section 45ZA of the RBI Act, 1934 requires the inflation target to be revised every three years.
3.The RBI Governor holds a casting vote in case of a tie in the MPC.
Which of the statements given above are correct?
As per the amended Reserve Bank of India Act, 1934, who determines India's inflation target?
With reference to India's inflation framework, match List-I with List-II and select the correct answer using the code given below:
List-I
A.Demand-pull inflation
B.Cost-push/supply-side inflation
C.Repo rate
D.MPC failure clause
List-II
1.Driven by crop damage, import costs, or supply disruptions
2.Driven by rising purchasing power or fiscal stimulus
3.Policy tool RBI uses mainly to influence demand-side inflation
4.Requires written explanation to government after three consecutive quarters of breach
If the RBI wants to curb demand-driven inflation, which of the following actions would it typically take?
1.Increase the repo rate
2.Increase the Cash Reserve Ratio
3.Buy government securities in the open market
Select the correct answer using the code given below:
The current inflation target under India's flexible inflation targeting framework, as notified, is applicable up to which year?
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