Question 42 from UPSC CSE 2015 - Economy

Question

With reference to inflation in India, which of the following statements is correct?

Accepted Answer

Correct Option: C. Decreased money circulation helps in controlling the inflation

Strategy: Focus on the core relationship between money supply and inflation. Options A and B are eliminated quickly because both the Government of India and RBI play roles in inflation control, refuting exclusivity or RBI's non-involvement. Between C and D, decreasing money circulation would logically limit inflation as less money chases goods, suppressing demand.

Key Info: Inflation is the general rise in prices and the corresponding fall in the purchasing value of money. In India, it is primarily measured by the Consumer Price Index (CPI) and the Wholesale Price Index (WPI).

Controlling inflation is a shared responsibility between the Reserve Bank of India (RBI) and the Government of India. The RBI uses monetary policy to influence the money supply, employing instruments such as:
- Repo rate
- Reverse repo rate
- Cash reserve ratio (CRR)
- Statutory liquidity ratio (SLR)

Increasing these rates and ratios decreases money circulation, which helps curb demand-pull inflation. The government complements these efforts with fiscal policy, adjusting taxes and spending to influence aggregate demand.

The RBI follows an 'Inflation Targeting' framework, with a current target of 4% (±2%) for CPI inflation. Generally, an increased money supply fuels inflation, while a decreased supply restricts it. However, both demand-side and supply-side factors can influence inflationary pressures in the economy.

Answer

Option A: Controlling the inflation in India is the responsibility of the Government of India only

Answer

Option B: The Reserve Bank of India has no role in controlling the inflation

Answer

Option D: Increased money circulation helps in controlling the inflation