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 :
1 and 2 only
2 only
1 and 3 only
1, 2 and 3
Answer is Wrong!
Answer is Right!
This question was previously asked in
UPSC IAS – 2020
Statement 2: Increasing the Marginal Standing Facility (MSF) Rate makes it more expensive for banks to borrow overnight funds from the RBI when there is a significant liquidity deficit. This tightens liquidity in the banking system, which is a contractionary measure. RBI would *not* do this in an expansionist policy.
Statement 3: Cutting the Bank Rate and Repo Rate reduces the cost at which commercial banks can borrow money from the RBI (long-term via Bank Rate, short-term via Repo Rate). Lower borrowing costs encourage banks to lend more, increasing liquidity and credit, which is an expansionist measure. So, RBI *would* do this.
The question asks what RBI would *not* do. Among the given statements, only statement 2 describes an action that is contrary to an expansionist monetary policy.