If the RBI decides to adopt an ‘expansionist’ monetary policy, which of the following it would not do?

1. Cut and optimise the Statutory Liquidity Ratio
2. Increase Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

1. 1 and 2 only
2. 2 only
3. 1 and 3 only
4. 1,2 and 3

Explanation

Statement 1 is incorrect

• Monetary policy is the process by which a country’s monetary authority (RBI) controls the money supply to achieve GDP growth and price stability. An “expansionist” monetary policy aims to stimulate economic growth by increasing the money supply and lowering interest rates.
• Statutory Liquidity Ratio or SLR is a minimum percentage of deposits that a commercial bank has to maintain in the form of liquid cash, gold or other securities. It is basically the reserve requirement that banks are expected to keep before offering credit to customers. These are not reserved with the Reserve Bank of India (RBI), but with banks themselves. Lowering the SLR increases the liquidity available with banks, allowing them to lend more. This is consistent with expansionary policy.

Statement 2 is correct

• Marginal Standing Facility (MSF) rate is the penal rate at which banks can borrow on an overnight basis from the central bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio. An expansionary policy typically involves lowering interest rates, so increasing the MSF rate would be contrary to an expansionist policy.

Statement 3 is incorrect

• Bank Rate: RBI lends money to its clients for long-term loans at this interest rate
• Repo Rate: RBI lends money to banks for short term loans at this interest rate
• An expansionary policy often involves cutting these rates to make borrowing cheaper and encourage spending.

Answer: (b) 2 only; Difficulty Level: Easy