Monetary Policy and Inflation Targeting

Statement 1 is Correct: The Monetary Policy Committee (MPC) does decide the RBI's benchmark interest rates. This is its primary function, and it influences the cost of borrowing and lending in the economy. Statement 2 is Incorrect: The MPC is a 6-member body, not 12. It includes the Governor of RBI and other members appointed by the government. The committee is not reconstituted every year, but members serve for specified terms. Statement 3 is Incorrect: The MPC functions under the chairmanship of the Governor of RBI, not the Union Finance Minister. Therefore, the correct answer is 1 only. Hence, option A is the correct answer.

Statement 1 is correct. As per the data given in the Economic Survey 2019-2020, the weightage of food in the Consumer Price Index (CPI) Combined is 45.9% as compared to 24.4% in Wholesale Price Index (WPI). Statement 2 is correct. The CPI measures the average change in prices over time that consumers pay for a basket of goods and services, commonly known as inflation, whereas WPI does not measure the average change in prices. Statement 3 is incorrect. In April 2014, the RBI adopted the Consumer Price Index (CPI) as its key measure of inflation. Hence, option A is the correct answer.

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates. Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more. Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity. Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity. Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

Statement 1 is incorrect. Typically, the RBI uses open market operations to sell government securities to drain money from the system and control inflation. Buying government securities would inject money into the system, potentially fueling inflation further. Statement 2 is correct. Selling dollars in the market - If the rupee is rapidly depreciating, the RBI might intervene in the foreign exchange market by selling dollars from its reserves. This increased supply of dollars in the market can help stabilize the exchange rate and slow down the depreciation of the rupee. Statement 3 is correct. Lower interest rates in the US/EU make India a more attractive destination for foreign investment, leading to a large inflow of dollars. This causes the rupee to strengthen (appreciate). To prevent the rupee from appreciating too rapidly and hurting exporters, the RBI buys the excess dollars from the market.

* Statement 1 is correct. The digital rupee, also known as the e-rupee or Central Bank Digital Currency (CBDC), is indeed a sovereign currency issued by the RBI. It's a digital representation of India's fiat currency and is part of the RBI's monetary policy toolkit. * Statement 2 is correct. Like physical currency, the digital rupee is a liability on the RBI's balance sheet. When you hold digital rupees, it's essentially a claim you have on the RBI, similar to holding physical banknotes. * Statement 3 is incorrect. The digital rupee, by itself, doesn't come with inherent inflation protection. Its value, like physical currency, is subject to inflationary pressures. The RBI manages inflation through its monetary policy measures, not through the inherent design of the digital rupee. * Statement 4 is correct. The digital rupee is designed to be freely convertible. This means you can easily exchange it with bank deposits (commercial bank money) and cash at a 1:1 ratio without any restrictions. Therefore, the correct answer is (D) 1, 2 and 4.