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:

QUESTION

Easy

Economy

Prelims 2020

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

Cut and optimize the Statutory Liquidity Ratio
Increase the Marginal Standing Facility Rate
Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

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Explanation

Expansionary Monetary Policy aims to stimulate economic activity by increasing the money supply and lowering interest rates.

Statement 1 is incorrect. Cut and optimize the Statutory Liquidity Ratio: This aligns with expansionary policy as it allows banks to lend more.

Statement 2 is correct. Increase the Marginal Standing Facility Rate: This goes against expansionary policy because it makes it more expensive for banks to borrow from RBI, potentially reducing liquidity.

Statement 3 is incorrect. Cut the Bank Rate and Repo Rate: This is a key tool for expansionary policy. Lowering these rates encourages banks to borrow from RBI and lend at lower rates to businesses and individuals, stimulating economic activity.

Therefore, increasing the Marginal Standing Facility Rate (MSF Rate) would contradict the goals of an expansionary monetary policy.

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