Q. 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
Correct Answer : b) 2 only
Question from UPSC Prelims 2020 GS Paper
Explanation:
Expansionist Monetary Policy
Expansionist monetary policy, also known as an expansionary or accommodative monetary policy, is a strategy used by a central bank like the Reserve Bank of India (RBI) to increase the supply of money in the economy in order to stimulate economic growth. This is typically done to combat low inflation, high unemployment, or to counteract a recession. The tools for this policy include lowering interest rates and decreasing reserve requirements.
Options for an Expansionist Monetary Policy
Let’s analyze the options given in the question:
- Cut and optimize the Statutory Liquidity Ratio (SLR): The SLR is the minimum percentage of deposits that a bank has to maintain in the form of gold, cash, or other approved securities. Reducing the SLR would allow banks to lend more, thereby increasing the money supply in the economy. This action aligns with an expansionist monetary policy.
- Increase the Marginal Standing Facility Rate (MSF): The MSF rate is the rate at which banks can borrow funds overnight from the RBI against approved government securities. Increasing the MSF rate would make borrowing more expensive for banks, which would likely reduce the money supply available for lending to the economy. This action does not align with an expansionist monetary policy; it is more in line with a contractionary monetary policy.
- Cut the Bank Rate and Repo Rate: The bank rate is the rate at which the RBI lends money to commercial banks, and the repo rate is the rate at which the RBI lends money to commercial banks in the short term. Reducing these rates would lower the cost of borrowing for banks, encouraging them to lend more and thus increasing the money supply. This action aligns with an expansionist monetary policy.
Given the above explanations, the action that the RBI would not do if it decides to adopt an expansionist monetary policy is:
2. Increase the Marginal Standing Facility Rate
Therefore, the correct answer is: b) 2 only