Q. With reference to inflation in India, which of the following statements is correct? (UPSC Prelims 2015)
Answer: Decreased money circulation helps in controlling the inflation
Notes: The correct answer is [C] Decreased money circulation helps in controlling the inflation. In economics, inflation is often described as "too much money chasing too few goods."

• Money Circulation (Statement C – Correct): Inflation occurs when the supply of money in the economy exceeds the supply of goods and services, leading to a fall in the purchasing power of currency. By decreasing money circulation (tightening liquidity), the aggregate demand in the economy is reduced, which helps stabilize or lower prices.
• Role of the RBI (Statement B – Incorrect): The Reserve Bank of India (RBI) plays a central role in controlling inflation. Under the Flexible Inflation Targeting (FIT) framework, the RBI is legally mandated to maintain consumer price inflation within a target band of 4% (with a margin of +/- 2%).
• Responsibility (Statement A – Incorrect): Controlling inflation is a joint responsibility. While the RBI manages Monetary Policy (adjusting interest rates like the Repo rate), the Government of India manages Fiscal Policy (reducing fiscal deficits, managing supply-side constraints, and controlling duties on essential imports).
• Increased Circulation (Statement D – Incorrect): Increasing money circulation generally leads to higher spending and demand. If the supply of goods cannot keep pace, this pushes prices higher, thereby increasing inflation rather than controlling it.

How RBI Decreases Circulation:The RBI uses several quantitative tools to suck liquidity out of the system:

• Increasing Repo Rate: Makes borrowing from the RBI more expensive for commercial banks.
• Increasing CRR (Cash Reserve Ratio): Forces banks to keep more cash with the RBI, leaving less for lending.
• Selling Government Securities (OMO): The RBI sells securities to banks, taking cash out of the banking system in exchange.