Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer:
B
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Explanation:
1. Statement 1 is incorrect. In an expansionist monetary policy, the RBI may consider cutting and optimizing the Statutory Liquidity Ratio (SLR). SLR is the percentage of net demand and time liabilities that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities. Reducing SLR frees up more funds for banks to lend, thereby increasing liquidity in the system.
2. Statement 2 is correct. In an expansionist monetary policy, the RBI would not increase the Marginal Standing Facility (MSF) rate. MSF is the rate at which banks can borrow overnight funds from the RBI against approved government securities. Increasing the MSF rate would make borrowing from the RBI more expensive and is generally associated with a contractionary monetary policy.
3. Statement 3 is incorrect. In an expansionist monetary policy, the RBI may consider cutting both the Bank Rate and Repo Rate. The Bank Rate is the rate at which the RBI lends to commercial banks, while the Repo Rate is the rate at which the RBI lends short-term funds to commercial banks for liquidity management. By reducing these rates, the RBI aims to make borrowing cheaper for banks, encouraging them to lend more and stimulate economic activity.