With reference to inflation in India, which of the following statements is correct?

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UPSC Prelims is a competitive examination conducted in India. This question is from the 2015 UPSC Prelims Economy paper.

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Question

With reference to inflation in India, which of the following statements is correct?

Accepted Answer

Correct Answer: C — Decreased money circulation helps in controlling the inflationStep-by-step Solution:The relationship between money supply and inflation is one of the most fundamental concepts in monetary economics. The Quantity Theory of Money states: MV = PQ (Money supply × Velocity = Price level × Real output). If velocity and output are relatively stable, increasing money supply (M) leads to higher prices (P) — i.e., inflation. Conversely, decreasing money circulation reduces demand pressure, which helps control inflation.When the RBI wants to control inflation, it uses contractionary monetary policy: increases Repo Rate (making borrowing expensive); increases CRR and SLR (reducing loanable funds); sells government securities (OMOs — absorbs liquidity); these measures reduce money supply in circulation, reduce consumer spending and investment, reduce aggregate demand, and eventually bring prices down.Why other options are incorrect:Option A (Inflation control is only the Government's responsibility): This is incorrect. Both the Government and the RBI share responsibility for controlling inflation. The government controls fiscal inflation (demand-pull through high deficit spending) through fiscal consolidation. The RBI controls monetary inflation through monetary policy. Since 2016, India has adopted an inflation targeting framework — the Monetary Policy Committee (MPC) is specifically mandated to maintain CPI inflation at 4% ± 2%, making RBI centrally responsible for inflation control.Option B (RBI has no role in controlling inflation): This is factually wrong. The RBI's primary mandate (since the FRBM and 2016 amendment to RBI Act) includes maintaining price stability. The MPC (comprising 3 RBI members + 3 government nominees) sets the Repo Rate specifically to target inflation.Option D (Increased money circulation helps control inflation): This is the exact opposite of the correct relationship. Increased money circulation fuels demand-pull inflation by giving consumers more spending power. The relationship is positive — more money → more spending → higher prices.Key Concept: Types of inflation: Demand-pull (excess aggregate demand over supply); Cost-push (rising input costs — oil, wages, raw materials); Structural inflation (supply bottlenecks); Monetary inflation (excess money creation). Inflation control measures: Monetary (RBI) — higher repo rate, higher CRR/SLR, OMOs, moral suasion; Fiscal (Government) — reduce deficit spending, cut subsidies, increase supply of goods; Supply-side — improve agricultural productivity, reduce import tariffs on food, PDS reform. MPC (Monetary Policy Committee): 6 members — 3 from RBI (Governor chairs, 2 Deputy Governors or officers), 3 external members appointed by government; inflation target 4% ± 2% band; meets every 2 months.

With reference to inflation in India, which of the following statements is correct?

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With reference to inflation in India, which of the following statements is correct?

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More Questions from Inflation – Types, Causes, Measurement & Control

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