Q. Consider the following statements:
1.Under inflation targeting, if inflation is above the target, the central bank will lower interest rates to bring inflation back to the target level.
2.In India, a significant amount of the household spending goes towards food.
3.When the Reserve Bank of India (RBI) raises the repo rate, it sometimes increases the core inflation.
How many of the statements given above are correct?
Explanation –
Statement 1 is incorrect. Under inflation targeting, if inflation is above the target, the central bank typically raises interest rates to reduce inflation by decreasing spending and demand.
Statements 2 and 3 are correct. A significant portion of household expenditure in India is allocated to food. In India, nearly 50% of household spending goes towards food, which is much higher compared to countries like the U.S., where it’s less than 10%. Raising the repo rate can sometimes lead to an increase in core inflation because businesses may raise prices to maintain profit margins despite higher borrowing costs and reduced sales. However, generally, raising the repo rate is intended to reduce inflation by making borrowing more expensive, thereby reducing spending and slowing down inflation.
Source: The Hindu
