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ENHI

RAS question

The inflation target set by the Government of India for RBI's MPC is:

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

The Government of India has set RBI's MPC an inflation target of 4% CPI, with a tolerance band of 2% to 6%.

  1. (A)

    6% with no tolerance band

  2. (B)

    5% with a tolerance band of +/- 1%

  3. (C)

    4% with a tolerance band of +/- 2%

  4. (D)

    2% with a tolerance band of +/- 1%

Explanation

Under India's flexible inflation targeting framework, introduced through the 2016 amendment to the RBI Act, the MPC works around a 4% CPI inflation target, not a single-point target without flexibility. The cited report on the Ministry of Finance notification confirms the same structure: the retail inflation target is four per cent, with an upper tolerance level of six per cent and a lower tolerance level of two per cent. That is why option C is precise: 4% with a tolerance band of +/- 2%. The band matters because inflation can move within 2% to 6% without breaching the framework; if it remains outside this range for three consecutive quarters, the MPC must report to the government.

Why the other options are wrong

  • (A) It wrongly treats 6% as the target, whereas 6% is only the upper tolerance level around the 4% target.
  • (B) It shifts the target to 5% and narrows the band to +/- 1%, while the notified framework uses 4% with a 2% to 6% range.
  • (D) It confuses the lower tolerance level of 2% with the target itself; the target remains 4% CPI.

Concept

This tests monetary policy under Indian Economy, especially flexible inflation targeting and the MPC's mandate. It recurs in RAS because inflation targeting links the RBI Act, CPI inflation and government-RBI accountability.

Source

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