UPSC Prelims 2022 Q68: Indian Economy – Monetary Policy & Money Supply

UPSC Prelims 2022, General Studies Paper I · Indian Economy

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

Answer: (d) Reserve Bank of India

Explanation

Who keeps prices stable in India?

The Reserve Bank of India is legally responsible for price stability.

The RBI Act, 1934 was amended in 2016 to add flexible inflation targeting.

Feature	Detail
Target	CPI inflation of 4%, with a band of 2-6%
Who sets the target	The Government, in consultation with the RBI, every five years
Who sets the repo rate	The six-member Monetary Policy Committee (MPC)
If the target is missed	RBI must explain to the Government after three quarters outside the band

Other options:

Body	Role
Department of Consumer Affairs	Monitors prices of essential goods; consumer protection
Expenditure Management Commission	2014 panel on government spending
FSDC	Financial stability and inter-regulator coordination

Answer: (d) Reserve Bank of India.

(a) Incorrect. The Department of Consumer Affairs monitors prices but does not control inflation through monetary policy.
(b) Incorrect. The Expenditure Management Commission (2014) reviewed government spending, not inflation.
(c) Incorrect. The FSDC handles financial stability and coordination among regulators, not price stability.
(d) CORRECT. The RBI, through the MPC, targets 4% CPI inflation under the amended RBI Act.

RBI is mandated (RBI Act amended 2016) to keep CPI inflation at 4% ± 2% through the Monetary Policy Committee.

Price stability is the RBI's job: 4% CPI, ±2%.

Choosing the FSDC because 'stability' appears in its name; it handles financial, not price, stability.
Thinking the Government sets the repo rate; the MPC does.
Confusing price monitoring (Consumer Affairs) with inflation control (RBI).

Inflation targeting = RBI + MPC + 4% CPI (2-6% band).