Which of the following statements regarding the Monetary Policy of the RBI is/are correct:
1. The primary and secondary objective of the Monetary Policy is to maintain price stability and growth respectively.
2. Market interest rates always align with policy rates due to Monetary Policy announcements.
Select the answer using the code given below:
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2
Explanation Statement 1 is not correct: The framework of central banking policy in India has evolved around its objectives specified under the Reserve Bank of India Act, 1934, viz. “to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage; and to operate a modern monetary policy framework to meet the challenge of an increasingly complex economy, where the primary objective is to maintain price stability while keeping in mind the objective of growth.”
Statement 2 is not correct: Market interest rates do not always perfectly align with policy rates. While policy rate changes announced in monetary policy meetings have a significant impact on market interest rates, other factors also play a role. These factors include market expectations, overall economic conditions, and the perceived risk associated with lending. Fiscal policy, too, can significantly influence market interest rates, particularly in the long run.
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