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:
Answer:
(c)
Core Books/NCERT
Expansionary monetary policy involves cutting interest rates or increasing the money supply to boost economic activity. An increase in the SLR constricts the ability of the bank to inject money into the economy which affects growth. Thus, statement (1) is not correct. The MSF or Marginal Standing Facility (MSF) Rate is the rate at which RBI lends funds overnight to scheduled banks, against government securities. It is used by RBI to control the money supply in the country’s financial system. Thus, statement (2) is correct. The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in order to help these lenders meet their short-term liquidity needs. This boosts economic activity. When Bank Rate is increased by RBI, bank’s borrowing costs increases which in return, reduces the supply of money in the market. Thus, statement (3) is not correct. Therefore, the correct answer is (b).