In India, which one of the following is responsible for maintaining price stability by controlling inflation?
Contents10
- ADepartment of Consumer Affairs
- BExpenditure Management Commission
- CFinancial Stability and Development Council
- DReserve Bank of India
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Answer: (D) Reserve Bank of India
The answer is (D) Reserve Bank of India.
This is straightforward. The RBI is India's central bank, and its primary job is maintaining price stability (controlling inflation).
How RBI controls inflation:
- Sets the repo rate (the interest rate at which it lends to banks)
- Uses tools like Open Market Operations (buying/selling government securities)
- Manages money supply through CRR (Cash Reserve Ratio) and SLR
- The Monetary Policy Committee (MPC) meets regularly to decide policy rates
When inflation is high → RBI raises repo rate → borrowing becomes expensive → people spend less → demand falls → prices cool down.
Why the other options are wrong:
(A) Department of Consumer Affairs handles consumer protection, not monetary policy
(B) Expenditure Management Commission advises on government spending
(C) Financial Stability and Development Council coordinates among financial regulators but doesn't directly control inflation
RBI is the only institution in India with the legal mandate to maintain price stability through monetary policy tools like repo rate and open market operations.
The Monetary Policy Committee was established in 2016 with a formal inflation target of 4% (+/- 2%), making this a key constitutional and policy framework topic for UPSC.
Reserve Bank of India & Monetary Policy
Indian Economy Reserve Bank of India price stability controlling inflation
RBI's Role in Price Stability & Inflation Control
RBI is India's central bank responsible for maintaining price stability by controlling inflation
Monetary Policy Committee (MPC) meets every 2 months to set policy rates
Repo rate is the primary tool - higher rates reduce inflation, lower rates stimulate growth
RBI uses CRR, SLR, and Open Market Operations to manage money supply
Primary Mandate
The Reserve Bank of India is the central bank responsible for price stability in India. This means controlling inflation to keep it within acceptable limits (currently targeting 4% with +/- 2% tolerance band).
RBI's Inflation Control Tools
Tool | How It Works | Impact on Inflation | Current Rate |
|---|---|---|---|
Repo Rate | Rate at which RBI lends to banks | Higher rate → Less borrowing → Lower inflation | Variable (set by MPC) |
Cash Reserve Ratio (CRR) | % of deposits banks must keep with RBI | Higher CRR → Less money in system → Lower inflation | Currently around 4% |
Statutory Liquidity Ratio (SLR) | % of deposits in government securities | Higher SLR → Less lending → Lower inflation | Currently around 18% |
Open Market Operations | Buying/selling government bonds | Selling bonds → Absorbs money → Lower inflation | As needed basis |
How Interest Rate Policy Controls Inflation
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**High Inflation Detected**
MPC observes inflation above target range`"]
s2["`**RBI Raises Repo Rate**
Makes borrowing more expensive for banks`"]
s3["`**Banks Raise Lending Rates**
Higher EMIs and loan costs for consumers`"]
s4["`**Reduced Borrowing & Spending**
People postpone purchases, businesses reduce investment`"]
s5["`**Demand Falls, Prices Stabilize**
Lower demand brings inflation under control`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5Monetary Policy Committee (MPC)
6-member committee - 3 RBI officials + 3 external experts appointed by Government
Governor is the chairperson with casting vote in case of ties
Meets bi-monthly (every 2 months) to review and set policy rates
Decisions taken by majority vote - transparent and democratic process
Inflation targeting mandate - must maintain CPI inflation at 4% (+/- 2%)
Question Context
This question tests the fundamental knowledge that RBI is India's central bank with the primary mandate of price stability. The trap is knowing that while other institutions handle different economic functions, only RBI has the tools and authority for inflation control.
Don't confuse Department of Consumer Affairs (handles consumer protection) with inflation control
FSDC coordinates financial regulators but doesn't directly control monetary policy
Expenditure Management Commission advises on government spending, not monetary policy
Remember: Price stability = Inflation control - this is RBI's core job, not just banking regulation
Key Financial Regulatory Institutions
Indian Economy Department of Consumer Affairs Expenditure Management Commission Financial Stability and Development Council
Financial & Economic Regulatory Bodies in India
FSDC coordinates among financial regulators but doesn't directly implement policies
Department of Consumer Affairs handles consumer protection, weights & measures, not monetary policy
Expenditure Management Commission advises government on spending efficiency and reforms
Key Economic Institutions & Their Roles
Institution | Primary Function | Headed By | Key Powers |
|---|---|---|---|
Reserve Bank of India | Monetary policy & banking regulation | Governor | Controls interest rates, money supply, inflation |
Financial Stability & Development Council (FSDC) | Coordination among financial regulators | Finance Minister | Policy coordination, no direct regulatory power |
Department of Consumer Affairs | Consumer protection & market regulation | Secretary (under Ministry of Consumer Affairs) | Price monitoring, weights & measures, consumer grievances |
Expenditure Management Commission | Government spending efficiency | Chairman (as appointed) | Advises on expenditure reforms, cost optimization |
Financial Stability & Development Council (FSDC)
Apex-level body for financial stability and development coordination
Chaired by Finance Minister with heads of all financial regulators as members
Coordination role only - does not replace individual regulator powers
Focuses on macro-prudential supervision and systemic risk assessment
Sub-committee headed by RBI Governor handles technical coordination
Department of Consumer Affairs
Under Ministry of Consumer Affairs, Food & Public Distribution
Handles consumer protection laws and grievance redressal mechanisms
Monitors prices of essential commodities but doesn't control inflation through monetary tools
Manages weights and measures standardization across the country
Operates consumer helplines and awareness programs
FSDC coordinates but doesn't directly control - it's a coordination body, not an implementing agency
Consumer Affairs monitors prices but this is market oversight, not inflation control through monetary policy
Don't mix coordination with implementation - FSDC coordinates, RBI implements monetary policy
Price monitoring ≠ Price control - Consumer Affairs tracks prices, RBI controls them through interest rates