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:
Explanation
An expansionary monetary policy (dovish/easy money policy) aims to stimulate macroeconomic growth by increasing credit availability and lowering borrowing costs:
– 1. Cutting the SLR: Reduces the mandatory reserve portion banks must invest in government securities, freeing up lendable capital for businesses and consumers (an action the RBI *would* take).
– 3. Cutting the Bank Rate and Repo Rate: Lowers commercial bank borrowing costs from the central bank, translating into lower interest rates across retail and industrial loans (an action the RBI *would* take).
– 2. Increasing the MSF Rate (The RBI would NOT do this): Raising the Marginal Standing Facility rate penalizes overnight borrowing, tightening interbank liquidity and raising credit costs, which is characteristic of a contractionary (tight) monetary policy stance.
Since the question asks what the RBI would not do, the answer is 2 only — Option B.