For UPSC 2026  PRELIMS Practice MCQs (Flexible Inflation Targeting (FIT))

(Based exactly on the RBI Discussion Paper + FIT review)

---

Q1. With reference to India’s Flexible Inflation Targeting (FIT) framework, consider the following statements:

1. It is legally backed by the RBI Act, 1934.

2. The inflation target is set by the Monetary Policy Committee (MPC).

3. FIT targets core inflation excluding food and fuel.

Which of the statements given above is/are correct?

A. 1 only

B. 1 and 3 only

C. 2 and 3 only

D. 1, 2 and 3

✅ Answer: A

(Target set by Govt + RBI; Headline CPI is targeted.)

---

Q2. The FIT framework is deemed to have failed if inflation:

A. Exceeds 5% for 3 months

B. Exceeds 6% for three consecutive quarters

C. Stays above 6% for any one quarter

D. Falls below 3% for two consecutive quarters

✅ Answer: B

---

Q3. Consider the following pairs:

Committee / Act	Main Contribution
1. Urjit Patel Committee	Recommended FIT in India
2. Chakravarty Committee	Analysed acceptable inflation level for India
3. FRBM Act	Ended monetisation of fiscal deficit

How many pairs given above are correctly matched?

A. Only one

B. Only two

C. All three

D. None

✅ Answer: C

---

Q4. Which of the following factors weaken the effectiveness of FIT?

1. Fiscal dominance

2. Persistent monetisation of deficit

3. Narrow monetary base

4. Second-round effects of food inflation

Select the correct answer using the code below:

A. 1 and 2 only

B. 1, 2 and 4 only

C. 2 and 3 only

D. 1, 2, 3 and 4

✅ Answer: B

---

Q5. “Threshold Inflation” refers to:

A. Minimum inflation required to meet fiscal targets

B. The level above which inflation begins to hurt growth

C. India’s long-term inflation average

D. The inflation rate decided by MPC every year

✅ Answer: B

(Threshold ≈ 3.98% for India.)

---

Q6. Which of the following best explains why headline inflation should be the target for India?

A. It is less volatile than core inflation

B. It better reflects the consumption basket of poor households

C. It is easier for RBI to predict

D. It excludes food and fuel prices

✅ Answer: B

---

Q7. Milton Friedman’s view, often quoted in Indian inflation debates, implies that:

A. Relative price changes cause inflation

B. Food price inflation always increases general inflation

C. General price level cannot rise without expansion of money supply

D. Inflation targeting is ineffective in developing economies

✅ Answer: C

---

Q8. The “upper-band drift” problem in FIT refers to:

A. MPC raising the upper tolerance level without approval

B. Inflation staying close to 6% for extended periods

C. Government frequently revising inflation bands

D. RBI ignoring core inflation while targeting headline inflation

✅ Answer: B

---

Q9. Which of the following are features of the Monetary Policy Committee (MPC)?

1. RBI Governor has the casting vote

2. Decisions are taken by consensus only

3. Government nominates 3 external members

Select the correct answer:

A. 1 and 3 only

B. 1 and 2 only

C. 3 only

D. 1, 2 and 3

✅ Answer: A

(Decisions by majority, not consensus.)