A
The RBI undertakes the responsibility of controlling credit created by commercial banks. RBI uses two methods to control the extra flow of money in the economy. These methods are quantitative and qualitative techniques to control and regulate the credit flow in the country. When RBI observes that the economy has sufficient money supply and it may cause an inflationary situation in the country then it squeezes the money supply through its tight monetary policy and vice versa.
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B
The Monetary Policy Committee’s decision to leave interest rates unchanged and retain its “accommodative” policy stance, albeit with one member dissenting over the stance, shows a central bank frozen into inaction by the “Knightian” or unquantifiable uncertainty surrounding the pandemic-hit economy. In sticking with the status quo, the RBI’s policymakers have underscored that they find themselves trapped in a no man’s land.
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C
The main aim of the financial policy is to retain price stability while considering the goal of growth. Stability in price is a necessary prerequisite to sustainable growth. The edited RBI Act also provides for the inflation target to be set by the Indian Government, after discussing with the Reserve Bank, once in every five years. The Central Government has mentioned in the Official Gazette 4% Consumer Price Index (CPI) inflation as the target for the period from 5 August 2016 to 31 March 2021, with the higher tolerance limit of 6% and the lower tolerance limit of 2%.
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D
Given this backdrop, policy makers are in an unenviable position. In this fast changing world, not only are they out of sync with their own economic realities but also with each other. In order to achieve lasting growth footing after Covid, they have been a little flexible with their inflation aim. In absence of robust growth, inflation was largely dubbed “transitory”, albeit not without a lot of debate.
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E
None of these
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