Question

Inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every _______ years.
1. 3
2. 5
3. 1
4. 4

Answer 1

Correct Answer - Option 2 : 5

The correct answer is 5.

• Inflation Targeting Framework
  • It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
  • It is based on the belief that long-term economic growth is best achieved by maintaining price stability, and price stability is achieved by controlling inflation.
  • Now there is a flexible inflation targeting framework in India (after the 2016 amendment to the Reserve Bank of India (RBI) Act, 1934).
  • The amended RBI Act provides for the inflation target to be set by the Government of India, in consultation with the Reserve Bank, once every five years. Hence, Option 2 is correct.
  • Section 45-ZA of the RBI Act, 1934 requires that the Central Government shall, in consultation with the Reserve Bank of India (RBI), determine the inflation target in terms of a consumer price index (CPI), once in every five years.

• Monetary Policy
  • It is the macroeconomic policy laid down by the central bank. It involves the management of money supply and interest rate and is the demand side economic policy used by the government of a country to achieve macroeconomic objectives like inflation, consumption, growth, and liquidity.
  • In India, the monetary policy of the Reserve Bank of India is aimed at managing the quantity of money to meet the requirements of different sectors of the economy and to increase the pace of economic growth.
  • The RBI implements the monetary policy through open market operations, bank rate policy, reserve system, credit control policy, moral persuasion, and through many other instruments.