UPSC Prelims 2015 Q87: Indian Economy – Inflation & Price Indices
With reference to inflation in India,
which of the following statements is correct?
- (a) Controlling the inflation in India is the responsibility of the Government of India only
- (b) The Reserve Bank of India has no role in controlling the inflation
- (c) Decreased money circulation helps in controlling the inflation
- (d) Increased money circulation helps in controlling the inflation
Answer: (c) Decreased money circulation helps in controlling the inflation
Explanation
Controlling inflation in India
Inflation often means too much money chasing too few goods.
So reducing the money in circulation helps to control it.
| Option | Verdict | Reason |
|---|---|---|
| (a) Controlling inflation is the responsibility of the Government of India only | Incorrect | The RBI shares the task |
| (b) The Reserve Bank of India has no role in controlling the inflation | Incorrect | The RBI is the main inflation fighter |
| (c) Decreased money circulation helps in controlling the inflation | Correct | Less money means less demand |
| (d) Increased money circulation helps in controlling the inflation | Incorrect | It makes inflation worse |
Who does what:
| Body | Tools |
|---|---|
| RBI | Raises repo rate, CRR, SLR; sells securities |
| Government | Cuts spending, changes taxes, releases food stocks, limits exports |
Since 2016 the RBI has a legal inflation target of 4 percent, within a band of 2 to 6 percent.
Answer: (c) Decreased money circulation helps in controlling the inflation.
Why each option is right or wrong
- (a) Incorrect. The Government is not the only body responsible; the RBI acts too.
- (b) Incorrect. The Reserve Bank of India has the leading role through monetary policy.
- (c) CORRECT. Decreased money circulation lowers demand and helps control inflation.
- (d) Incorrect. Increased money circulation fuels inflation.
Key point
Inflation control: RBI tightens money (higher repo, CRR, SLR); Government uses fiscal and supply steps; target 4 percent (2 to 6 percent band) since 2016.
Remember
Less money in circulation = lower inflation.
Common mistakes
- Accepting 'only' in option (a).
- Thinking more money in circulation cools prices.
- Forgetting the RBI's legal inflation target under the amended RBI Act.
Exam tip
Less money, less demand, lower prices. Options (c) and (d) are opposites; one must be right.
Sources
- Reserve Bank of India — Monetary Policy Framework Agreement and RBI Act amendment (2016)
- NCERT Class XII — Introductory Macroeconomics, Ch 3 (Money and Banking)