UPSC CSE Prelims
Question 40
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:
View correct answer and explanation
Correct answer: B
Correct Option: B (2 only)
Explanation: An expansionary monetary stance aims to lower the cost of liquidity and credit. Raising the Marginal Standing Facility rate would tighten, not ease, borrowing conditions.
Statement / Pair / Item-wise Analysis:
1. Incorrect - A reduction in SLR can release bank resources and is compatible with monetary easing.
2. Correct - Increasing the MSF rate raises emergency overnight borrowing cost, contrary to expansion.
3. Incorrect - Reducing Bank Rate and repo rate eases interest-rate conditions.
Option-wise Analysis:
A. Incorrect-includes incorrect item 1 (A reduction in SLR can release bank resources and is compatible with monetary easing).
B. Correct-includes all and only valid statements/items 2.
C. Incorrect-includes incorrect item 1 (A reduction in SLR can release bank resources and is compatible with monetary easing); includes incorrect item 3 (Reducing Bank Rate and repo rate eases interest-rate conditions); omits correct item 2 (Increasing the MSF rate raises emergency overnight borrowing cost, contrary to expansion).
D. Incorrect-includes incorrect item 1 (A reduction in SLR can release bank resources and is compatible with monetary easing); includes incorrect item 3 (Reducing Bank Rate and repo rate eases interest-rate conditions).
Review note: Here T means an action the RBI would NOT normally do under expansion; the question is negatively worded.