Topic: Indian Economy and issues relating to planning, mobilization of resources
Q5. Examine the role of monetary policy in ensuring price stability during periods of global uncertainty. Evaluate the limitations of monetary policy in addressing supply-side inflation. Suggest suitable policy interventions. (15 M)
Difficulty Level: Medium
Reference: IE
Why the question
The RBI’s recent monetary policy decision to keep the repo rate unchanged at 5.25% despite inflationary pressures has revived the debate on the role and limits of monetary policy in managing inflation during global uncertainty.
Key Demand of the question
The question requires examining how monetary policy helps maintain price stability during uncertain global conditions, evaluating why it is less effective against supply-side inflation, and suggesting suitable policy interventions to improve inflation management.
Structure of the Answer:
Introduction
Briefly explain the objective of monetary policy and its importance in maintaining price stability and macroeconomic stability.
Body
- Role of monetary policy: Explain how monetary policy contributes to maintaining price stability during global uncertainty.
- Limitations in addressing supply-side inflation: Evaluate why monetary policy alone cannot effectively tackle supply-driven inflation.
- Policy interventions: Suggest coordinated monetary, fiscal and structural measures for effective inflation management.
Conclusion
Highlight the need for a balanced policy mix combining monetary discipline with structural reforms to ensure durable price stability and sustainable growth.
