In India, which one of the following is responsible for maintaining price stability by controlling inflation?
(a) Department of Consumer Affairs
(b) Expenditure Management Commission
(c) Financial Stability and Development Council
(d) Reserve Bank of India
Explanation
The answer is (d) Reserve Bank of India (RBI)
- The Reserve Bank of India (RBI) is the central bank of India. It was established in 1935.
- One of the major functions of RBI is to regulate the issue of bank notes and keeping reserves to ensure monetary stability in India.
- RBI uses various monetary policy tools to control inflation and ensure price stability. These include:
- Repo rate, reverse repo rate, bank rate
- Open market operations
- Cash reserve ratio (CRR)
- Statutory liquidity ratio (SLR)
- Liquidity adjustment facility (LAF)
- The Monetary Policy Committee (MPC) of RBI decides on the policy interest rates required to achieve the inflation target set by the government.
- The current inflation target is 4% with a tolerance band of +/- 2%.
- Hence, Reserve Bank of India is responsible for maintaining price stability in India by controlling inflation.
The other options are incorrect:
- Department of Consumer Affairs deals with consumer grievances and ensuring fair trade practices. It does not control inflation.
- Expenditure Management Commission was proposed but never established.
- Financial Stability and Development Council (FSDC) aims to strengthen financial stability and inter-regulatory coordination. It does not directly control inflation.
In summary, Reserve Bank of India (RBI) is the institution responsible for maintaining price stability in India by controlling inflation. This is achieved through various monetary policy tools under the framework of inflation targeting set by the government.
Learn more
- Inflation refers to the sustained increase in the general price level of goods and services in an economy over a period of time.
- High and volatile inflation is detrimental to the economy as it reduces purchasing power, distorts investment decisions, and creates uncertainty.
- The main causes of inflation in India are:
- Rising input costs such as fuel, commodities
- Supply constraints and production bottlenecks
- Increase in money supply due to fiscal deficit monetization
- Demand-pull factors during growth acceleration
- RBI aims to keep inflation low and stable around 4% to support growth while protecting the purchasing power of the rupee.
- RBI uses both demand-side tools (interest rates, reserve requirements) and supply-side measures (easing constraints, monitoring prices) to control inflation.
- The government also has a role in controlling inflation through prudent fiscal policy, removing supply bottlenecks, and monitoring prices of essential commodities.
- Coordination between fiscal and monetary policies is essential for effective inflation management.
