If the RBI decides to adopt an expansionist monetary policy, which of the following would it 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:
Answer & explanation
Answer: (b) 2 only
Raising the Marginal Standing Facility (MSF) rate is the one step RBI would not take, because it makes emergency overnight borrowing costlier for banks and so tightens money. An expansionary policy pushes the other way: it cuts reserve requirements such as the SLR and cuts the Bank Rate and repo rate to make credit cheaper.
- ✓ 1. Consistent with an expansionary policy: a lower reserve requirement leaves banks more money to lend, which raises credit and money supply. So RBI would do this.
- ✗ 2. The MSF rate is the penal rate at which banks borrow overnight from RBI against their SLR securities, and the Bank Rate moves with it. Raising it makes borrowing dearer, a tightening step, so RBI would not do this (this is the answer).
- ✓ 3. Consistent with an expansionary policy: NCERT notes that a fall in the bank rate can increase money supply; a lower repo rate likewise makes borrowing from RBI cheaper. So RBI would do this.
Remember · Expansionary policy = cheaper and more plentiful credit: lower SLR, Bank Rate and repo rate. A higher MSF rate (the penal borrowing rate) is a tightening step.
📘 Read it in NCERT: Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter) · Class 12 Introductory Macroeconomics, Ch 3 (practise this chapter)
Sources
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. A fall in the bank rate can increase the money supply.”
- NCERT Class 12 · Introductory Macroeconomics, Chapter 3 “if the Central bank changes the reserve ratio, this would lead to changes in lending by the banks which, in turn, would impact the deposits and hence, the money supply.”
- Reserve Bank of India, Monetary Policy: operating framework (MSF rate) ↗ “The penal rate at which banks can borrow, on an overnight basis, from the Reserve Bank by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit”
Question and answer: UPSC's official GS Paper I (2020, Series A) — paper ↗ · answer key ↗. Explanation: Minimalist IAS, checked 30 Sept 2026 (how we verify). ·