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Q87 (IAS/2015) Economy › Money, Banking & Inflation › Inflation and policy Official Key

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

Result
Your answer: —  ·  Correct: C
Explanation

The prime objective of any measure to check inflation is to reduce the flow of money supply in the economy or reduce the liquidity in the market.[1] When money circulation decreases, there is less purchasing power in the economy, which helps moderate demand-pull inflation and brings prices under control.

Option A is incorrect because under the Reserve Bank of India Act, 1934 (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability[2], and the combined impact of the Reserve Bank of India's calibrated monetary policy and the Government of India's focused interventions help ease supply-side constraints and stabilise prices[3]. This shows inflation control is a shared responsibility.

Option B is incorrect because one of the main goals of monetary policy in India is the control of inflation and the role of the Reserve Bank of India (RBI) in this process is rather important.[4] The RBI increases the repo rate to control inflation, which[5] reduces the amount of money in circulation, cooling down the economy and curbing inflation.[5]

Option D is incorrect as increased money circulation actually fuels inflation rather than controlling it.

Sources
  1. [1] Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > MEASURES TO CHECK INFLATION > p. 71
  2. [2] https://www.bis.org/publ/bppdf/bispap157_i.pdf
  3. [3] https://static.pib.gov.in/WriteReadData/specificdocs/documents/2025/apr/doc2025416540901.pdf
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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. With reference to inflation in India, which of the following statements is correct? [A] Controlling the inflation in India is the respon…
At a glance
Origin: Books + Current Affairs Fairness: Low / Borderline fairness Books / CA: 2.5/10 · 7.5/10
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This is a 'Sitter'—a fundamental concept question that defines your entry into the serious aspirant league. It tests basic macroeconomic literacy (Quantity Theory of Money) and institutional awareness (RBI vs. Govt roles). If you get this wrong, you are likely failing the exam due to weak basics, not lack of current affairs.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Is controlling inflation in India solely the responsibility of the Government of India?
Origin: Web / Current Affairs Fairness: CA heavy Web-answerable

Web source
Presence: 5/5
"Under the Reserve Bank of India Act, 1934 (as amended in 2016), RBI is entrusted with the responsibility of conducting monetary policy in India with the primary objective of maintaining price stability, while keeping in mind the objective of growth."
Why this source?
  • Explicitly assigns responsibility for conducting monetary policy—and maintaining price stability—to the Reserve Bank of India, indicating a non-governmental actor has primary inflation-related duties.
  • Shows inflation control is a statutory central-bank responsibility, so it is not solely the Government of India’s task.
Web source
Presence: 5/5
"This consistent moderation highlights the combined impact of the Reserve Bank of India’s calibrated monetary policy and the Government of India’s focused interventions to ease supply-side constraints and stabilise prices of essential commodities."
Why this source?
  • Describes inflation moderation as the "combined impact" of the RBI’s monetary policy and Government interventions, directly attributing roles to both institutions.
  • Supports the view that inflation control is shared between the RBI and the Government, not solely the Government.
Web source
Presence: 4/5
"The Minister stated that the Government of India has undertaken a series of administrative measures, including fiscal and trade policy, to control inflation and mitigate its impact on the common citizen."
Why this source?
  • Lists specific administrative, fiscal and trade measures undertaken by the Government to control inflation, showing the Government’s role but not exclusivity.
  • Implies a complementary role to the RBI by describing government actions to mitigate inflationary impact.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > MEASURES TO CHECK INFLATION > p. 71
Strength: 5/5
“Inflation can be controlled by different measures. Inflation is controlled to ideal rates (zero rate of inflation is never preferred). For a developing country like India, desired rate of inflation is 3-4 per cent. It is not easy to control inflation by using a specific measure or an instrument. The prime objective of any measure to check inflation is to reduce the flow of money supply in the economy or reduce the liquidity in the market. Following are the three categories of measures: • A. Fiscal Measures \mathcal{C} B. Monetary Measures \mathcal{C} Administrative Measures \mathcal{C}”
Why relevant

Lists three categories of measures to control inflation: fiscal, monetary and administrative — implying multiple actors/instruments.

How to extend

A student can note fiscal = government, monetary = central bank (RBI), administrative = regulatory/other agencies, so control likely shared.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > A. Fiscal Measures > p. 72
Strength: 5/5
“The Government uses fiscal measures to control inflation. The two main components of fiscal policy are government revenue and government expenditure. Under fiscal policy, the government (not RBI) controls inflation and in the following ways: • By reducing private spending (by enhancing taxes on private businesses), i.e. when the 1. government reduces private spending by increasing taxes, individuals decrease their total expenditure; and the money supply in the economy is reduced.• 2. By decreasing non-developmental government expenditure.• 3. By avoiding deficit financing as far as possible. Use of option 2 above may not be feasible all the time as the Government expenditure may be required for ongoing projects and managing strategic sectors like health, education, defence, etc.”
Why relevant

Explicitly describes fiscal measures and states 'The Government uses fiscal measures... Under fiscal policy, the government (not RBI) controls inflation'.

How to extend

Combine this with knowledge that fiscal policy is only one of several measure types to infer government is a major but not sole actor.

Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 60
Strength: 5/5
“The RBI Act 1934 provides for the inflation target to be set by the government of India, in consultation with the Reserve Bank, once in every five years.• The inflation is the "Consumer Price Index (CPI) – Combined" published by Ministry of Statistics and Programme Implementation (NSO)• The RBI shall be seen to have failed to meet the Target if inflation is more than 6% or less than 2% for three consecutive quarters• In case RBI fails to meet the target, it will have to give a written report to Government of India explaining the reasons of failure, remedial actions to be taken and an estimated time period within which the Target would be achieved The Government of India constituted "Monetary Policy Committee" (MPC) in September 2016 which now determines the Policy (Repo) Rate required to achieve the inflation target. • RBI should organize at least four meetings of Monetary Policy Committee (MPC) in a year.”
Why relevant

Says the GOI sets the inflation target in consultation with the RBI and constituted the Monetary Policy Committee (MPC) to determine policy (repo) rate.

How to extend

Use this to infer that GOI and RBI share institutional roles: GOI sets target while RBI/MPC implements monetary policy to meet it.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY COMMITTEE > p. 172
Strength: 5/5
“The RBI Act, 1934, was amended in 2016 to provide a statutory and institutionalised framework for the creation of Monetary Policy Committee (MPC). MPC was set up in 2016 to meet the objective of Monetary Policy Framework Agreement (entered in 2015 between RBI and GOI) by entrusting RBI with the additional responsibility of inflation targeting, while keeping in mind the objective of economic growth. As per Monetary Policy Framework Agreement, RBI is responsible to contain annual inflation at 4 per cent (±2%) until March 2021 as per the current mandate. RBI is answerable to GOI if the inflation exceeds the range for three consecutive months.”
Why relevant

States the RBI (via MPC) was entrusted with inflation targeting and is responsible for containing annual inflation within a range; RBI is answerable to GOI if it misses the range.

How to extend

A student could combine this with the idea that operational responsibility lies with RBI whereas GOI has target-setting and oversight roles.

Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 4: Inflation > RECENT EFFORTS BY THE GOVERNMENT TO CONTROL INFLATION > p. 75
Strength: 4/5
“The GOI has taken several steps to control inflation (especially on food items): • Encouraging State governments to take strict action against hoarding and black marketing 1. and effectively enforce the Essential Commodities Act, 1955, and the Prevention of Black-marketing and Maintenance of Supplies of Essential Commodities Act, 1980 for commodities in short supply. • Facilitating ease of doing business which reduces various transactional and logistical 2. costs for producers.”
Why relevant

Provides examples of GOI administrative actions (e.g., enforcement against hoarding, Essential Commodities Act) to control food inflation.

How to extend

Shows the government has specific administrative levers for certain inflation sources, suggesting shared responsibilities depending on cause.

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