If the RBI decides to adopt an expansionist monetary policy, which of the following would is 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 :

The correct answer is B. Only statement 2 is contractionary, so it is the one an expansionist RBI would not do.

• Statement 1 (cutting SLR) is expansionist. SLR is the share of deposits banks must hold in government securities, cash or gold. Lowering it frees up funds for lending, which adds to the money supply.
• Statement 2 (raising MSF rate) is contractionary. The Marginal Standing Facility is the rate at which banks borrow overnight from the RBI against securities. Raising it makes emergency borrowing costlier and tightens liquidity, so it is the opposite of an expansionary move.
• Statement 3 (cutting Bank Rate and Repo Rate) is expansionist. Repo is the rate at which the RBI lends short-term to banks. Cutting it, along with the Bank Rate, makes credit cheaper across the system.

The concept here is the monetary policy toolkit: repo, reverse repo, MSF, CRR, SLR and open market operations. The corridor between the repo and MSF rates is the core of liquidity management. For Mains, it links directly to transmission of rate cuts to lending rates.

Trap: candidates often treat MSF as a cheap liquidity window and assume any change in it is easing. Also check the framework, since the MSF and Bank Rate linkage has been revised over time.