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. I

1. A. 1 and 2 only
2. B. 2 only
3. C. 1 and 3 only
4. D. 1, 2 and 3

Answer: B

Explanation

Expansionist/expansionary monetary policy is when the central bank of a country increases money supply to stimulate the economy. The tools used by the RBI to control money supply in the economy can be quantitative or qualitative. Quantitative tools control the extent of money supply by changing the Cash Reserve Ratio (CRR), or Statutory Liquidity Ratio (SLR), or bank rate or Liquidity Adjustment Facility (LAF) that includes Marginal Standing Facility (MSF). If RBI changes reserve ratios, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply. SLR is the ratio of liquid assets to the demand and time liabilities (NDTL). RBI increases SLR to reduce bank credit during the time of inflation. Similarly, it reduces SLR during the time of recession to increase bank credit. Therefore, cutting and optimising SLR is something the RBI would do under its expansionist monetary policy. MSF is an emergency window available to scheduled banks to borrow from RBI on an overnight basis by pledging government securities. Increase the MSF rate of interest will make borrowing costly, and thus is something that the RBI would not do as part of its expansionist monetary policy. The rate of interest charged by RBI on loans extended to commercial banks is called Bank Rate. Repo rate is the rate at which the RBI lends to commercial banks by purchasing securities. Lower bank rates and repo rates would reduce the cost of borrowing, and thus will increase liquidity in the economy. Cutting bank rate and repo rate is something the RBI would do under its expansionist monetary policy. Therefore, correct option is (b) 2 only