question_answer

Direction: Read the passage carefully and answer the questions given below it. Certain words/phrases are given in bold to help you locate them while answering some of the questions.

The Expert Committee formed under the supervision of Reserve Bank of India (RBI) Deputy Governor, Urjit Patel, released their report to revise and strengthen the monetary policy framework, earlier this year. Since then, the report has been heavily discussed and debated in academic and policy circles. It recommends a fundamental change in the way monetary policy is conducted in India. The one recommendation that has been the main talking point so far is the adoption of a flexible inflation target. Here we attempt to analyse this particular recommendation of the committee against the backdrop of the current Indian economic scenario.

Monetary policy in independent India has evolved substantially over the past several decades. India adopted widespread liberalisation, privatisation, and deregulation reforms in the early 1990s. During the post-liberalisation period running up to the present time, the RBI has been following a multiple-indicator approach for executing monetary policy. In this approach, information is gathered on various macroeconomic indicators such as output, trade, credit, inflation rate, exchange rate, capital flows etc. Thereafter, monetary policy is designed to fulfil the multiple objectives of increasing employment, closing the gap with potential output, moderating inflation, stabilising exchange rate and so on.

This kind of multiple-indicator approach, however, lacks a nominal anchor or a specific target per se and hence it may be argued that it is less likely to be effective in achieving all the objectives at the same time. Such an approach makes the monetary policy highly discretionary and runs the risk of sending confusing signals to market participants as well as corporations.

In India, the multiple-indicator approach of the monetary Policy worked relatively well, especially between the late 1990s and late 2000s when Indian GDP was growing at a healthy and robust rate of close to 10 per cent or more, and inflation (measured by the wholesale price index or WPI) was moderate at around 5-6 per cent. This was also the time when all was apparently well in the global economy, which was going through a phase of relatively low output volatility.

 

What is the meaning of the phrase 'flexible inflation target' as used in the given passage?

A) Flexible inflation target means to calculate core inflation on the basis of variable CPI for certain goods and services.

B) Flexible inflation target means the policy rate set up by the central bank so as to stablilise inflation around the targeted rate and also stabilise the real economy.

C) Flexible inflation target means the target set by the central bank by which it tries to bring inflation back to the targeted rate after a deviation.

D) Flexible inflation target is a forecast published by the RBI in respect of the policy rate and inflation for bringing real economic stability.

E) None of these