MPPSC 2025 Prelims Paper-I · Question 31 of 100

Correct — B, maintain price stability while ensuring economic growth. Since the RBI Act, 1934 was amended in 2016 (the new Chapter III-F, Sections 45ZA onwards), India's monetary policy carries a statutory mandate in almost these words: to maintain price stability while keeping in mind the objective of growth. The Central Government, in consultation with the RBI, notifies a CPI inflation target once every five years — currently 4% with a tolerance band of ±2% (that is, 2% to 6%) — and a six-member Monetary Policy Committee sets the policy repo rate to achieve it. Price stability is therefore the primary objective, with growth as the stated qualifier, not the other way round.

• (a)Increase government spending — Government expenditure is fiscal policy, decided by the Union Government through the Budget. The central bank has no power to set how much the government spends; monetary policy works on the price and availability of money, not on public expenditure.
• (c)Reduce fiscal deficit — The fiscal deficit is again a budgetary outcome, managed by the Finance Ministry within the framework of the FRBM Act, 2003. Monetary policy can influence the government's interest bill, but shrinking the deficit is not its mandate.
• (d)Control foreign exchange reserves — The RBI does manage the country's foreign exchange reserves and intervenes in the forex market (under FEMA, 1999), but that is reserve and exchange-rate management — a separate central-bank function. The RBI Act names price stability, with growth in mind, as the primary objective of monetary policy.

Monetary policy is the central bank's control over the price and quantity of money — mainly through the policy repo rate and liquidity operations — to influence demand and, through it, inflation. India moved to a formal 'flexible inflation targeting' framework in 2016: the objective was written into the RBI Act, a numerical CPI target was notified by the government, and rate decisions moved from the Governor alone to a statutory Monetary Policy Committee. 'Flexible' is the operative word — the RBI must aim at the inflation target while keeping growth in view.

The trap is that all four options are real things the state does. Sort them by who does them: spending and deficits belong to fiscal policy (Ministry of Finance), while reserves and the exchange rate are RBI functions but not the statutory objective of monetary policy. Only one option echoes the language of the amended RBI Act — price stability while keeping in mind the objective of growth.

• The RBI Act, 1934, as amended in 2016, makes price stability — while keeping in mind the objective of growth — the primary objective of monetary policy.
• Inflation target: 4% CPI with a tolerance band of ±2% (2%–6%), notified by the Central Government in consultation with the RBI once every five years.
• The Monetary Policy Committee has 6 members — 3 from the RBI (the Governor as chairperson, the Deputy Governor in charge of monetary policy, and one officer nominated by the Central Board) and 3 external members appointed by the Central Government; the Governor has a casting vote in a tie.
• 'Failure' is defined in law as average CPI inflation staying above 6% or below 2% for three consecutive quarters, after which the RBI must report to the Central Government.
• The MPC must meet at least four times a year; in practice it meets six times.

• Treating higher public spending or a lower fiscal deficit as monetary-policy goals — both are fiscal
• Assuming growth is the primary objective; the Act makes price stability primary, with growth as the qualifier
• Confusing the Monetary Policy Committee (6 members, sets the repo rate) with the RBI's Central Board of Directors

MPPSC asks it as a one-line 'primary/chief objective' recall. UPSC prefers statement-based questions — on the MPC's composition and powers, on what counts as a monetary-policy instrument, or on what the RBI would and would not do under an expansionary stance.

• practice — not a real PYQ

  Under the amended RBI Act, the inflation target for monetary policy in India is fixed by:

  • (a)The Monetary Policy Committee of the RBI
  • (b)The Central Government, in consultation with the RBI
  • (c)The Governor of the RBI alone
  • (d)The Finance Commission

  Answer(b) The Central Government, in consultation with the RBI — notified once every five years; the MPC then sets rates to achieve that target.

• practice — not a real PYQ

  The Monetary Policy Committee constituted under the RBI Act consists of how many members?

  • (a)Four
  • (b)Six
  • (c)Eight
  • (d)Twelve

  Answer(b) Six — three from the RBI (Governor as chair, one Deputy Governor, one nominated officer) and three external members appointed by the Central Government.