Inflation targeting is practiced in India through a Monetary Policy Framework Agreement between the ...........

Economic Affairs Inflation

Inflation targeting is practiced in India through a Monetary Policy Framework Agreement between the Government of India and Reserve Bank of India. If RBI fails to meet the inflation target, the agreement says that

The Chairman of the Monetary Policy Committee (MPC) RBI should resign
RBI should communicate the causes of such failure to the government and give the steps to tame inflation
RBI should immediately increase the CRR and Repo rates to cut down the inflation
The Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) should be closed down

Select the correct answer using the codes below.

1, 2 and 3 only

2, 3 and 4 only

2 only

1, 3 and 4 only

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Explanation:

Inflation beyond a certain level is detrimental to the economy and monetary policy needs to be tied to short-term and long-term economic goals. Both of these necessitate such monetary agreements between the central bank and the government.

Statement 1: No such provision, but successive failures in reining the inflation may voluntarily result in the resignation of the RBI Governor.

Statement 2: This is to introduce transparency and predictability in monetary policy.

Statement 3: There is no such provision, and merely increasing CRR or repo rates may not solve the problem especially if it is rooted in infrastructural bottlenecks and deeper economic issues.

Statement 4: Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) window created by Reserve Bank of India in its credit policy of May 2011. MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities.