UPSC Prelims Practice Questions — Does inflation targeting work in India?

Q1. Consider the following statements comparing the successive steps in the adoption of inflation targeting in India: 1. The Monetary Policy Framework Agreement of February 2015 set the objective of bringing inflation below 6 per cent by January 2016, while placing the target for 2016-17 and subsequent years at 4 per cent with a band of +/- 2 per cent. 2. The expert committee report of January 2014 that recommended a nominal anchor had prescribed a disinflation glide path of 8 per cent by January 2015 and 6 per cent by January 2016. 3. The 2016 Official Gazette notification, unlike the 2015 Agreement, dispensed with a lower tolerance limit and specified only an upper tolerance limit of 6 per cent. Which of the statements given above is/are correct?

  1. The Monetary Policy Framework Agreement of February 2015 set the objective of bringing inflation below 6 per cent by January 2016, while placing the target for 2016-17 and subsequent years at 4 per cent with a band of +/- 2 per cent.
  2. The expert committee report of January 2014 that recommended a nominal anchor had prescribed a disinflation glide path of 8 per cent by January 2015 and 6 per cent by January 2016.
  3. The 2016 Official Gazette notification, unlike the 2015 Agreement, dispensed with a lower tolerance limit and specified only an upper tolerance limit of 6 per cent.
  • A. 1 and 2 only
  • B. 2 and 3 only
  • C. 1 and 3 only
  • D. 1, 2 and 3

Q2. The power of the Central Government to determine, in consultation with the Reserve Bank, the inflation target in terms of the Consumer Price Index once in every five years and to notify it in the Official Gazette is derived from which one of the following provisions of the Reserve Bank of India Act, 1934?

  • A. Section 45ZB of the Reserve Bank of India Act, 1934
  • B. Section 45ZN of the Reserve Bank of India Act, 1934
  • C. Section 45ZA of the Reserve Bank of India Act, 1934
  • D. Section 45ZL of the Reserve Bank of India Act, 1934

Q3. In the decision-making procedure of India's Monetary Policy Committee, the expression 'casting vote' of the Governor denotes which one of the following?

  • A. The power of the Governor to override, by a recorded order, a rate decision carried by a majority of the six members
  • B. A second vote available to the Governor, exercisable only when the members of the Committee are equally divided on a resolution
  • C. The right of each member to have a written statement explaining the vote published along with the resolution of the Committee
  • D. The vote of the Deputy Governor in charge of monetary policy being counted twice whenever the Governor is absent from a meeting

Q4. Which one of the following statements about the constitution of India's Monetary Policy Committee is correct?

  • A. It is constituted entirely by the Central Board of the Reserve Bank, which nominates all six members from among the officers of the Bank
  • B. All six members are appointed by the Central Government exclusively from outside the Reserve Bank, each for a fixed term of four years
  • C. It is constituted by the Ministry of Finance in consultation with the Financial Stability and Development Council, which alone ratifies its rate decisions
  • D. It is constituted by the Central Government by notification in the Official Gazette and includes three ex officio members drawn from the Reserve Bank

Q5. Consider the following statements regarding the review of India's monetary policy framework completed in 2026 as compared with the earlier review: 1. The 2026 review replaced headline Consumer Price Index inflation with core inflation, excluding food and fuel, as the anchor of the target. 2. It was the second quinquennial review of the framework, the first having been completed on 31 March 2021. 3. The Central Government retained both the 4 per cent target and the tolerance band of +/- 2 per cent for the period from April 2026 to March 2031. Which of the statements given above is/are correct?

  1. The 2026 review replaced headline Consumer Price Index inflation with core inflation, excluding food and fuel, as the anchor of the target.
  2. It was the second quinquennial review of the framework, the first having been completed on 31 March 2021.
  3. The Central Government retained both the 4 per cent target and the tolerance band of +/- 2 per cent for the period from April 2026 to March 2031.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q6. The Discussion Paper released in August 2025 inviting public feedback on the level of the inflation target, the width of the tolerance band and the choice of the price index, ahead of the review due in March 2026, was brought out by which one of the following?

  • A. The Department of Economic Affairs in the Ministry of Finance
  • B. The Reserve Bank of India
  • C. The NITI Aayog, through its Economics and Finance vertical
  • D. The National Statistical Office in the Ministry of Statistics and Programme Implementation

Q7. In the debate on India's inflation targeting framework, the proposition that the country's Phillips curve is 'flat' means which one of the following?

  • A. Households' inflation expectations remain persistently higher than the central bank's own published projections
  • B. The output gap responds only weakly to changes in the policy rate because banks pass on rate changes incompletely
  • C. Inflation is insensitive to movements in the output gap, so compressing demand yields little disinflation for a given loss of output
  • D. Inflation and unemployment move together rather than in opposite directions, so the trade-off between them is permanent

Q8. The all-India Consumer Price Index (Combined) that serves as the anchor index for India's inflation target is compiled and released by which one of the following?

  • A. The Office of the Economic Adviser, Department for Promotion of Industry and Internal Trade
  • B. The Labour Bureau, Ministry of Labour and Employment
  • C. The Department of Statistics and Information Management, Reserve Bank of India
  • D. The National Statistical Office, Ministry of Statistics and Programme Implementation

Q9. With reference to the design of India's inflation target and its tolerance band, consider the following: 1. The target is specified in terms of headline Consumer Price Index (Combined) inflation. 2. Failure to maintain the target is deemed to have occurred when average inflation stays outside the tolerance band for three consecutive quarters. 3. The target is determined by the Central Government in consultation with the Reserve Bank once in every five years. 4. The upper tolerance limit is 6 per cent and the lower tolerance limit is 3 per cent. Which of the above is/are correctly identified?

  1. The target is specified in terms of headline Consumer Price Index (Combined) inflation.
  2. Failure to maintain the target is deemed to have occurred when average inflation stays outside the tolerance band for three consecutive quarters.
  3. The target is determined by the Central Government in consultation with the Reserve Bank once in every five years.
  4. The upper tolerance limit is 6 per cent and the lower tolerance limit is 3 per cent.
  • A. 1 and 2
  • B. 2, 3 and 4
  • C. 1, 2 and 3
  • D. 1 and 4

Q10. Which one of the following central banks was the first in the world to operate monetary policy under a formal, announced numerical inflation target agreed with its government?

  • A. The Bank of Canada
  • B. Sveriges Riksbank of Sweden
  • C. The Reserve Bank of New Zealand
  • D. The Bank of England

Q11. In the 2025-26 public debate in which Reserve Bank officials defended retaining headline inflation as the formal target, the term 'core inflation' was used to mean which one of the following?

  • A. That portion of measured inflation which is generated solely by demand conditions and is entirely free of supply shocks
  • B. Consumer Price Index inflation computed after excluding the food and the fuel components of the index
  • C. Consumer Price Index inflation computed after excluding all administered prices, and the only measure that inflation-targeting central banks target
  • D. The long-run trend rate of inflation in the economy, which necessarily converges to the notified target of 4 per cent