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RAS question

The inflation target for MPC is set at:

Correct answer: (A) 4% with a band of +/- 2%.

India's Monetary Policy Committee works with a medium-term CPI inflation target of 4%, within a tolerance band of +/- 2%.

  1. (A)

    4% with a band of +/- 2%

  2. (B)

    4% with a band of +/- 1%

  3. (C)

    3% with a band of +/- 2%

  4. (D)

    5% with a band of +/- 1%

Explanation

The MPC's inflation target is 4% CPI inflation, with a tolerance band of +/- 2%, so the acceptable range is 2% to 6%. This falls under India's Flexible Inflation Targeting framework, set in 2016 and renewed in 2021 for another five years. The RBI's Monetary and Credit Information Review confirms that MPC decisions are made in line with the objective of achieving the medium-term target for consumer price index inflation of 4% within a band of +/- 2%, while supporting growth. That is why the answer is not just "4%" in isolation: the tolerance band is part of the target framework and is tested with the target figure.

Why the other options are wrong

  • (B) A +/- 1% band would imply a 3% to 5% range, but the MPC framework uses a wider +/- 2% tolerance band around 4%.
  • (C) The target is 4% CPI inflation, not 3%, even though the tolerance band is correctly stated as +/- 2%.
  • (D) This option gets both elements wrong: the target is 4%, not 5%, and the tolerance band is +/- 2%, not +/- 1%.

Concept

This tests the monetary policy framework, especially inflation targeting by the MPC. It recurs in RAS because CPI inflation, growth support and RBI policy rates are core Indian Economy themes.

Source

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