If the RBI decides, to adopt an expansionist monetary policy
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:
- 1 and 2 only
- 2 only
- 1 and 3 only
- 1, 2 and 3
Answer: B
Explanation
Expansionary monetary policy involves cutting interest rates or increasing the money supply to boost economic activity. An increase in the SLR constricts the ability of the bank to inject money into the economy which affects growth. Thus, statement (1) is not correct.
The MSF or Marginal Standing Facility (MSF) Rate is the rate at which RBI lends funds overnight to scheduled banks, against government securities. RBI has introduced this borrowing scheme to regulate short-term asset liability mismatch in a more effective manner. MSF basically provides a greater liquidity cushion. Higher the MSF rate, more expensive is borrowing for banks, as well as corporate borrowers and individuals. It is used by RBI to control the money supply in the country’s financial system. Thus, statement (2) is correct.
The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in order to help these lenders meet their short-term liquidity needs. If the repo rate is low, banks are required to pay lower interest amount towards loans. This impacts the loans taken by customers, who can also avail loans at lower interest rates. This boosts economic activity.
The rate of interest charged by the central bank on the loans they have extended to commercial banks and other financial institutions is called "Bank Rate". When Bank Rate is increased by RBI, bank’s borrowing costs increases which in return, reduces the supply of money in the market. Thus, statement (3) is not correct.
- Exam Year: 2020