EPFO EO/AO 2023 General Ability Test · Question 111 of 120

Correct — C, (c) Statement I is correct but statement II is incorrect. This is one of only four questions in the paper set in the Statement I and Statement II form, and the four options between them cover the possible relationships in a fixed order: option (a) says both are correct and the second explains the first; option (b) says both are correct but the second is not the correct explanation of the first, with the word not printed in bold italics because that single word is the entire difference between (a) and (b); option (c) says the first is correct and the second is not; option (d) says the first is not correct and the second is. Work the two statements independently for truth first, and only then, if both survive, ask about explanation. Statement I is correct. Section 45ZA of the Reserve Bank of India Act, 1934, inserted by the Finance Act, 2016, provides that the Central Government shall, in consultation with the Bank, determine the inflation target in terms of the Consumer Price Index once in every five years, and notify it in the Official Gazette. Every element of the statement matches that provision: the Central Government determines it, the consultation is with the Reserve Bank, the measure is the Consumer Price Index and the interval is five years. The target notified under the provision has been 4 per cent with a tolerance band of two percentage points either side, so an upper limit of 6 per cent and a lower limit of 2 per cent, and the same 4 per cent target with the same band has since been carried forward to 31 March 2031. Statement II is incorrect. The monetary policy framework is not operated by the Central Government. Section 45ZB of the same Act constitutes a six-member Monetary Policy Committee, chaired by the Governor and including the Deputy Governor in charge of monetary policy, one officer of the Bank nominated by the Central Board, and three external members appointed by the Central Government. That committee determines the policy repo rate required to achieve the inflation target, each member has one vote, and the Governor has a casting vote in the event of a tie. The Reserve Bank then implements the decision through its liquidity operations. The Government's role in the framework is to fix the target in consultation with the Bank and to appoint the three external members, and to receive a report under section 45ZN if the target is missed for three consecutive quarters. Fixing the goal is not the same as operating the framework, and it is that distinction the statement gets wrong. One statement true and the other false gives option (c), and the question of whether II explains I never arises.

• (a)Both statement I and statement II are correct and statement II is the correct explanation for statement I — This option requires two things, and it fails at the first. Statement II is not correct, because the framework is operated by the Reserve Bank through its Monetary Policy Committee and not by the Central Government. Even supposing it were correct, it could not serve as the explanation of statement I: the reason the inflation target is fixed in terms of the Consumer Price Index once in five years is that the statute says so, and who operates the framework day to day has no bearing on that. On these items the explanation limb is only reached when both statements are true, so a candidate who tests truth first never has to consider it here.
• (b)Both statement I and statement II are correct and statement II is not the correct explanation for statement I — The booklet prints the word not in this option in bold italics, and the emphasis matters: this option and option (a) agree that both statements are true and differ only on whether the second explains the first. That makes (b) the option a candidate reaches after correctly judging that the two statements are about different things, which is a sound instinct applied to a case where it does not apply. It fails for the same reason (a) does, one step earlier: statement II is not correct at all, so the pair never reaches the stage at which the explanation limb is tested. The discipline this item rewards is to score each statement true or false before reading the options, because two of the four options can then be discarded without any thought about explanation.
• (d)Statement I is incorrect but statement II is correct — This reverses both judgments. Statement I is a close paraphrase of section 45ZA of the Reserve Bank of India Act, 1934, and there is nothing in it to reject: the Central Government does determine the inflation target, it does so in consultation with the Reserve Bank, the target is expressed in terms of the Consumer Price Index, and it is set once in five years. Statement II, by contrast, misplaces the operation of the framework. A candidate can land here by remembering that the Government sets the target and concluding from that alone that the Government must run the framework, thereby getting both halves the wrong way round. Keeping the two roles apart, one body setting the goal and another choosing the instruments to reach it, is the whole point of a statutory inflation-targeting framework.

India adopted a flexible inflation-targeting framework in 2016. The Finance Act, 2016 amended the Reserve Bank of India Act, 1934 to insert a new chapter on monetary policy, and the framework has two clearly separated limbs. The goal is set politically: under section 45ZA the Central Government, in consultation with the Reserve Bank, determines the inflation target in terms of the Consumer Price Index once in every five years and notifies it in the Official Gazette, together with upper and lower tolerance levels. The instruments are chosen technically: under section 45ZB a six-member Monetary Policy Committee, comprising the Governor as chairperson, the Deputy Governor in charge of monetary policy, one officer of the Bank nominated by the Central Board and three external members appointed by the Central Government, determines the policy repo rate required to achieve the target. The committee meets at least four times a year, needs a quorum of four, decides by majority with the Governor holding a casting vote, and its resolution is implemented by the Bank through liquidity management. Accountability runs back to the Government: under section 45ZN, if average inflation lies outside the tolerance band for three consecutive quarters the Bank must report to the Central Government explaining the failure, the remedial action proposed and the time it expects to take. The word flexible in flexible inflation targeting refers to the tolerance band and to the mandate to keep the objective of growth in mind while pursuing price stability.

Monetary policy is one of the recurring economy themes in the EO/AO General Ability Test, and it is a natural subject for Statement I and Statement II items because the framework divides responsibilities between two institutions in a way that is easy to state and easy to garble. The discrimination in this question is exactly that division: the Government sets the target, the Bank's committee operates the framework. Candidates who have learned only the phrase 'inflation targeting' will know that the Government is involved somewhere and may over-extend that involvement. The habit rewarded is to attach a section number and an actor to each element of the framework, because a question of this type is answered by naming who does what.

• Section 45ZA of the Reserve Bank of India Act, 1934, inserted by the Finance Act, 2016: the Central Government, in consultation with the Bank, determines the inflation target in terms of the Consumer Price Index once in every five years.
• The target is 4 per cent with a tolerance band of plus or minus 2 percentage points, that is, an upper limit of 6 per cent and a lower limit of 2 per cent, carried forward to 31 March 2031.
• Section 45ZB constitutes the six-member Monetary Policy Committee: the Governor as chairperson, the Deputy Governor in charge of monetary policy, one officer of the Bank nominated by the Central Board, and three external members appointed by the Central Government.
• The Monetary Policy Committee determines the policy repo rate required to achieve the inflation target; each member has one vote and the Governor has a casting vote.
• The committee meets at least four times a year with a quorum of four members.
• Section 45ZN: if average inflation is outside the band for three consecutive quarters, the Bank must report to the Central Government on the failure and the remedial action.
• The Government's role is to set the target and appoint the external members; the Reserve Bank operates the framework.

• Assuming that because the Government sets the inflation target it also operates the monetary policy framework.
• Attributing the choice of the policy repo rate to the Governor alone rather than to the Monetary Policy Committee.
• Confusing the five-yearly target-setting cycle with the bi-monthly policy meeting cycle.
• Reading the target as being expressed in Wholesale Price Index terms; the statute names the Consumer Price Index.
• On a Statement I and Statement II item, jumping to the explanation limb before both statements have been scored for truth.

The EO/AO paper sets monetary policy either as a Statement I and Statement II item like this one, as a two-statement code item on the composition or powers of the Monetary Policy Committee, or as a single-line question on an instrument such as the repo rate or the cash reserve ratio. The recurring device is to swap the actors: the Government for the Bank, the Bank for the committee, or the committee for the Governor. Learn the framework as a list of who does what under which section, and these questions become a matter of checking one attribution.

No directly related past PYQ was found.

• practice — not a real PYQ

  Under the Reserve Bank of India Act, 1934, the inflation target in India is determined by :

  • (a)The Reserve Bank of India, in consultation with the Central Government, once in three years
  • (b)The Central Government, in consultation with the Reserve Bank of India, once in five years
  • (c)The Monetary Policy Committee, once in five years
  • (d)Parliament, by a resolution passed every year

  Answer(b) The Central Government, in consultation with the Reserve Bank of India, once in five years

• practice — not a real PYQ

  Which one of the following statements about the Monetary Policy Committee is correct ?

  • (a)It has six members, of whom three are external members appointed by the Central Government
  • (b)It has four members, all of them officers of the Reserve Bank of India
  • (c)It is chaired by the Union Finance Minister
  • (d)Its decisions require unanimity among all members

  Answer(a) It has six members, of whom three are external members appointed by the Central Government