Monetary Policy in Present-Day India

Question 1

What are the three main strategies used in creating monetary policy?

Answer 1

Exchange Rate Stability
Multiple Indicators
Flexible Inflation Targeting (FIT) / Price Stability

Question 2

Which monetary policy strategy focuses on stabilizing the exchange rate and is often used by export-oriented economies?

Answer 2

Exchange Rate Stability

Question 3

Describe the Multiple Indicators monetary policy strategy.

Answer 3

This strategy takes into account several economic factors: economic growth, employment, inflation control, and the exchange rate. The RBI used this strategy until 2016.

Question 4

What is Flexible Inflation Targeting (FIT), and why is it considered a successful model?

Answer 4

FIT focuses primarily on controlling and reducing inflation. The belief is that managing inflation positively influences other economic indicators. This model has been effective in many Western nations.

Question 5

Why did India adopt the Flexible Inflation Target strategy?

Answer 5

India adopted FIT based on the recommendation of the Urjit Patel Committee Report (2013-14). It was implemented in 2016 through an amendment to Section 45 of the RBI Act.