Question 42 from UPSC CSE 2020 - ECONOMICS

Question

If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimise 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:

Accepted Answer

Correct Option: B. 2 only

Strategy: Identify the objective of an expansionist monetary policy--which is to inject liquidity and lower borrowing costs.

Cutting SLR (statement 1) and cutting bank/repo rates (statement 3) both achieve this by making more funds available and reducing interest costs. However, increasing the Marginal Standing Facility (MSF) rate (statement 2) does the opposite: it discourages borrowing by making emergency funds more expensive. Therefore, excluding statement 2 is key, and only option B fits.

Key Info: Expansionist (or expansionary) monetary policy aims to boost economic activity by increasing money supply and reducing the cost of credit. The Reserve Bank of India (RBI) primarily uses several instruments:

- Statutory Liquidity Ratio (SLR): This is the minimum percentage of deposits that banks must maintain in the form of liquid assets, such as cash or government securities, before providing credit. Lowering the SLR increases banks' lendable resources, promoting credit expansion.

- Marginal Standing Facility (MSF) Rate: MSF allows scheduled commercial banks to borrow overnight funds from the RBI by pledging government securities. An increase in the MSF rate makes this borrowing more expensive, restricting liquidity, which is counter to an expansionary stance. Reducing the MSF rate, conversely, eases liquidity stress for banks.

- Bank Rate and Repo Rate:
  - Bank Rate: The rate at which RBI lends to commercial banks without any security. A decrease in the bank rate lowers borrowing costs for banks.
  - Repo Rate: The rate at which the RBI lends to commercial banks against government securities. Cutting the repo rate similarly reduces the cost of funds, encouraging banks to lend more.

Such measures, when employed in an expansionist policy, are designed to facilitate greater flow of credit in the economy, stimulate investment and consumption, and help counter economic slowdowns. By contrast, increasing policy rates or reserve requirements is characteristic of contractionary monetary strategies meant to rein in inflation. The RBI regularly fine-tunes these instruments in alignment with macroeconomic conditions and monetary policy framework objectives.

Answer

Option A: 1 and 2 only

Answer

Option C: 1 and 3 only

Answer

Option D: 1, 2, and 3

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

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

Cut and optimise 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: