UPPSC-UPPCS Mains- Answer writing practice #52

UPPSC/UPPCS Mains- Answer writing practice

Discuss the limitation of monetary policy in achieving its primary objective of inflation control. (200 words)

मुद्रास्फीति नियंत्रण के अपने प्राथमिक उद्देश्य को प्राप्त करने में मौद्रिक नीति की सीमा पर चर्चा करें। (200 शब्द)


Model Answer

What is monetary policy and RBI mandate:

Monetary Policy is the macroeconomic policy laid down by the central bank which involves management of money supply and interest rates. It is a demand side economic policy to achieve objectives likeinflation, consumption, growth and liquidity.
Under the Monetary policy framework agreement signed between the RBI and the government, RBI has been mandated to target inflation through monetary policy. It will strive to achieve medium term target for Consumer Price Index inflation of 4(+/-)
2 percent while supporting growth.

Monetary policy limitations:

However, sometimes the inflation targeting approach of the Central Bank is criticized for hampering other macroeconomic goals like economic growth, consumption and employment generation as monetary policy can also be used to promote economic growth by ensuring adequate availability of credit and lowering the cost of credit. .
As business and industry requires finance for working capital as well as for capital formations, central bank follows a tight monetary policy to keep inflation in the intended range ( by raising repo rate) lending rates of interests of banks become high. This also discourages private investments, which in turn has a spiral effect on consumption and employment opportunities as well as capital formation.
However, it can be argued that there is little or no conflict between the objectives of price stability and growth. Price stability is a means to ensure economic growth in long term. A large expansion in money supply and bank credits leads to the increase in aggregate demand which tends to cause a higher inflation.
It should also be noted that apart from demand side inflation, RBI has to take other factors into consideration like volatile crude oil prices, global turmoil, trade wars etc. Moreover, the banks are at times reluctant to pass on the benefits of reduced rates to the consumers due to their bad balance sheet.(Increase NPA).


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