UPSC Prelims 2020 - Question 57

Table of Contents

Select the correct answer using the code given below:
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3

Answer: B

Under an expansionary monetary policy, the RBI seeks to increase the money supply in the economy.
Statement 1 is not correct: Statutory Liquidity Ratio (SLR) is a monetary policy tool that the Reserve Bank of India (RBI) uses to assess the liquidity at the banks’ disposal. It is the minimum percentage of deposits that a commercial bank has to maintain in the form of cash, gold, or other securities. Reducing SLR leaves more liquidity with banks, which in turn can fuel growth and demand in the economy.
Statement 2 is correct: Marginal standing facility (MSF) is a window for scheduled banks to borrow overnight from the RBI in an emergency situation when interbank liquidity dries up completely. Increasing the Marginal Standing Facility Rate will make borrowings by the banks more expensive and thus, the higher interest rates would be passed on to the borrowers of the banks making credit more expensive in the economy and discouraging loan activities, and reducing the money supply.
Statement 3 is not correct: Cutting the Bank Rate and Repo Rate will make borrowing by the banks cheaper, the benefit of which would then be passed on to the borrowers taking loans from banks thus providing cheaper credit which will result in more borrowing and thus increased money supply