4) It is high time for both the RBI and the government to make a choice between legislative mandates of inflation rate targeting and a holistic approach for development management. Critically Comment.(250 words)

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TopicIndian Economy and issues relating to planning, mobilization of resources, growth, development and employment.

4) It is high time for both the RBI and the government to make a choice between legislative mandates of inflation rate targeting and a holistic approach for development management. Critically Comment.(250 words)

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Why this question

A strict Inflation targeting approach of the RBI, as mandated, has been criticized for various reasons with restricting development opportunities being the most important of them. The RBI has recently been increasing repo rate as well as reverse repo rates under inflationary expectations. It is necessary to revisit the issue and have a short discussion thereupon.

Directive word

Critically Comment- here we have to express our knowledge and understanding of the issue and form an overall opinion thereupon. Here we have to look at both negative as well as positive aspects and then form our opinion on the issue.

Key demand of the question.

The question wants us to discuss the positive as well as negative aspects of inflation targeting and how it affects development of the country. Based on our discussion we have to form a substantive conclusion on the issue.

Structure of the answer

Introduction– write a few lines about the mandate of RBI to restrict inflation to 4 +/- 2%. Also mention RBI’s recent monetary policy changes like hike in repo and reverse repo rates.

Body-

  • Discuss the positive aspects of such a targeting approach on development.  E.g fosters stable macroeconomic conditions; stable inflation rates and expectations- linked to such domestic and business decisions; generates high investment confidence etc.
  • DIscuss the negative aspects. E.g restricts development opportunities, inadequate allocation of public funds for social sectors; propagates social inequality; is insufficient as a measure because of strong association of inflation in India with the supply side etc.

Conclusion– Based on your discussion form a conclusion as to what should be done in this regard. Your opinion should be supported by further arguments in case needed.