ECONOMICS

ECONOMICS

Which of the following hold significance for ‘Inflation Targeting’?

1. Repo rates
2. Cash Reserve Ratio
3. Fiscal Consolidation
4. Supply of Essential Commodities

Select the correct answer using the code given below.

(a) 1 and 2 only

(b) 1, 2 and 3 only

(c) 3 and 4 only

(d) 1, 2, 3 and 4

answer - D

When the central bank follows Inflation Targeting, the government and the central bank together have to take steps towards ensuring price stability.

Strong macroeconomic fundamentals like:

• Stable growth
• Low current account deficit
• Narrowing fiscal deficit
• Moderating inflation
• Low short term foreign currency liabilities and
• Sizeable exchange reserves relative to imports and liabilities, are necessary for ensuring price stability.

Repo rates and CRR are of importance to control liquidity and hence inflation. Too much money chasing too few goods will lead to inflation.

Structural imperfections like hoarding and tax structures may also create supply side constraints leading to inflation.