What is the primary objective of the Monetary Policy ?

Question

UnlockIAS · Accepted Answer

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.

Why the other options are wrong — (a) 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) 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) 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.

Concept: 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.

State PCS 2025 Q31 — Economy PYQ with Answer

State PCS 2025 Q31 — Economy PYQ with Answer