UPSC Prelims 2022 Q68: Price Stability and Inflation Control — Explained
In India, which one of the following is responsible for maintaining price stability by controlling inflation?
- Department of Consumer Affairs
- Expenditure Management Commission
- Financial Stability and Development Council
- Reserve Bank of India
Answer: (d) Reserve Bank of India
Statement-wise explanation
- a: incorrect — The Department of Consumer Affairs sits under the Ministry of Consumer Affairs, Food and Public Distribution. Its Price Monitoring Division tracks daily retail and wholesale prices of 22 essential commodities, such as rice, pulses, onion and edible oil. It runs the Price Stabilisation Fund, which builds buffer stocks of items like pulses and onion and releases them to cool prices. That is supply-side management of a few goods. It has no legal mandate to control overall inflation and no power over interest rates.
- b: incorrect — The Expenditure Management Commission was announced in the Union Budget 2014-15. It was set up in August 2014 under former RBI Governor Bimal Jalan. It was a temporary advisory body on government spending: subsidy reform, fiscal deficit and expenditure efficiency. It never had any role in setting monetary policy or controlling prices.
- c: incorrect — The Financial Stability and Development Council (FSDC) was set up by a government notification on 30 December 2010. It is a non-statutory body chaired by the Union Finance Minister. Its mandate is financial stability, financial sector development, coordination among regulators, and financial literacy. Financial stability means a sound banking and markets system, which is different from price stability, meaning low and steady inflation.
- d: correct — The Preamble of the RBI Act, 1934, as amended in May 2016, says that 'the primary objective of monetary policy is to maintain price stability while keeping in mind the objective of growth.' Under Section 45ZA, the Central Government sets the inflation target in consultation with the RBI once every five years. The target is 4% CPI inflation within a band of 2% to 6%. Under Section 45ZB, the six-member Monetary Policy Committee of the RBI fixes the policy repo rate needed to meet that target.
How to eliminate
Basic knowledge is enough here. Inflation control in India works through monetary policy: the repo rate, liquidity and the inflation target. Monetary policy is the central bank's job, so the RBI is the natural fit. Each of the other options is a trap that sounds related. 'Consumer Affairs' sounds like prices, but it only monitors and stabilises prices of a few essential goods. 'Expenditure Management' is about government spending, which is fiscal policy, not monetary policy. 'Financial Stability' sounds close to 'price stability', but it refers to the health of the financial system. Remember the exact phrase from the RBI Act Preamble: 'price stability while keeping in mind the objective of growth', and the 4% ± 2% CPI target under Section 45ZA.
Know more
Flexible inflation targeting (FIT) in India
India adopted FIT formally through the Finance Act, 2016, which amended the RBI Act, 1934 in May 2016. It has four parts:
- Objective (Preamble): keep prices stable while keeping growth in mind. The word 'flexible' refers to this growth clause.
- Target (Section 45ZA): the Central Government sets it in consultation with the RBI, in terms of CPI (Combined), once every five years. The target is 4% with a tolerance band of 2% to 6%. It was first notified in August 2016, renewed for 2021–26, and renewed again for April 2026 to March 2031.
- Who decides (Section 45ZB): a six-member Monetary Policy Committee (MPC). Three members come from the RBI, including the Governor, who chairs it and has a casting vote. Three external members are appointed by the Centre. The MPC sets the policy repo rate.
- Accountability: the RBI has failed if average inflation stays above 6% or below 2% for three consecutive quarters. It must then report to the government why it failed, what it will do, and how long it will take to return to the target.
Who does what on prices and stability
| Body | Nature | Role |
|---|---|---|
| RBI / MPC | Statutory (RBI Act) | Inflation targeting through the repo rate |
| FSDC | Non-statutory (2010), chaired by the Finance Minister | Financial stability and coordination among regulators |
| Dept. of Consumer Affairs | Government department | Price monitoring of essential goods; Price Stabilisation Fund |
| Expenditure Management Commission | Temporary commission (2014) | Advice on government spending |
Inflation also depends on government action, such as cutting import duties, releasing buffer stocks or changing fuel taxes. The legal mandate for price stability, though, lies with the RBI.
In the news
In early 2022, CPI inflation rose above the 6% upper limit. It reached 7% in March 2022. On 4 May 2022, the RBI's MPC held an off-cycle meeting and raised the repo rate by 40 basis points to 4.40%, the first increase since August 2018. This happened about a month before the exam, which put the RBI's inflation mandate in the news.
NCERT Concepts to Revise
- Flexible inflation targeting: India's monetary policy framework, which defines who is legally charged with keeping prices stable.
- Inflation targeting: Explains the rule-based framework that ties a numerical inflation goal to one institution.
- Monetary Policy Committee: The statutory committee that sets the repo rate to meet the CPI inflation target.
- Central bank: The question tests which kind of institution is the monetary authority responsible for prices.
- Central bank independence: Helps tell apart a body that runs monetary policy from bodies chaired by or attached to the government.