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Consider the following statements regarding Inflation targeting.
1. It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
2. The amended RBI Act provides for the inflation target to be set by the Reserve Bank of India once every five years.
Which of the statements given above is/are correct?
- a)1 only
- b)2 only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
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Consider the following statements regarding Inflation targeting.1. It...
The correct answer is 1 only.
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- The Centre has decided to retain the inflation target of 4%, with a tolerance band of +/- 2 percentage points for the Monetary Policy Committee of the RBI for the coming five years.
Key-Points
Inflation targeting
- It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation. Hence statement 1 is correct.
- The principle of inflation targeting 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.
Inflation Targeting Framework:
- 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 statement 2 is not correct.
Current Inflation Target:
- The Central Government has notified 4 percent Consumer Price Index (CPI) inflation as the target for the period from August 5, 2016, to March 31, 2021. The upper tolerance limit of 6 percent, and the lower tolerance limit of 2 percent.
Most Upvoted Answer
Consider the following statements regarding Inflation targeting.1. It...
Inflation targeting is a monetary policy framework adopted by central banks to maintain price stability in the economy. Let's discuss the given statements in detail:
Statement 1: It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
This statement is correct. Inflation targeting is a policy framework that aims to keep inflation within a specific target range over a certain period. Central banks use various monetary policy tools such as interest rates, reserve requirements, open market operations, etc. to achieve the target inflation rate. By controlling inflation, central banks can stabilize the economy, encourage investment, and promote economic growth.
Statement 2: The amended RBI Act provides for the inflation target to be set by the Reserve Bank of India once every five years.
This statement is incorrect. The amended RBI Act of 2016 provides for a Monetary Policy Committee (MPC) to be established with the mandate of maintaining price stability in the economy. The MPC is responsible for setting the inflation target for the Reserve Bank of India (RBI) once every five years. The target is set in consultation with the government of India and is reviewed annually to ensure that it remains appropriate for the prevailing economic conditions.
Therefore, the correct answer is option 'A' - 1 only.
Statement 1: It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.
This statement is correct. Inflation targeting is a policy framework that aims to keep inflation within a specific target range over a certain period. Central banks use various monetary policy tools such as interest rates, reserve requirements, open market operations, etc. to achieve the target inflation rate. By controlling inflation, central banks can stabilize the economy, encourage investment, and promote economic growth.
Statement 2: The amended RBI Act provides for the inflation target to be set by the Reserve Bank of India once every five years.
This statement is incorrect. The amended RBI Act of 2016 provides for a Monetary Policy Committee (MPC) to be established with the mandate of maintaining price stability in the economy. The MPC is responsible for setting the inflation target for the Reserve Bank of India (RBI) once every five years. The target is set in consultation with the government of India and is reviewed annually to ensure that it remains appropriate for the prevailing economic conditions.
Therefore, the correct answer is option 'A' - 1 only.
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Consider the following statements regarding Inflation targeting.1. It is a central banking policy that revolves around adjusting monetary policy to achieve a specified annual rate of inflation.2. The amended RBI Act provides for the inflation target to be set by the Reserve Bank of India once every five years.Which of the statements given above is/are correct?a)1 onlyb)2 onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?
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