In India, which one of the following is responsible for maintaining price stability by controlling i

Question

In India, which one of the following is responsible for maintaining price stability by controlling inflation?

Accepted Answer

The Reserve Bank of India (RBI) is vested with the responsibility of conducting monetary policy. This responsibility is explicitly mandated under the Reserve Bank of India Act, 1934. The primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth. Price stability is a necessary precondition to sustainable growth. The MPC (Monetary Policy Committee) determines the policy interest rate required to achieve the inflation target. The Reserve Bank’s Monetary Policy Department (MPD) assists the MPC in formulating the monetary policy. Views of key stakeholders in the economy, and analytical work of the Reserve Bank contribute to the process for arriving at the decision on the policy repo rate. The Financial Markets Operations Department (FMOD) of RBI operationalises the monetary policy, mainly through day-to-day liquidity management operations. The Financial Markets Committee (FMC) meets daily to review the liquidity conditions so as to ensure that the operating target of the weighted average call money rate (WACR) is aligned with the repo rate. There are several direct and indirect instruments that are used by RBI for implementing monetary policy for price stability by keeping check on inflation such as:  Repo rate Reverse repo Open market operations Liquidity adjustment facility  For example, RBI does it by increasing the repo rate in the economy, if inflation is high. Increase in interest rate is believed to bring down the inflation level in the economy by curtailing the amount of economic activity whereas decreasing the interest rate increases the inflation level of the economy by increasing the economic activity. Hence option (d) is the correct answer.