Question 57

An expansionist monetary policy aims to increase the money supply in the economy, lower interest rates, and stimulate economic growth. The Reserve Bank of India (RBI) uses various tools to achieve this:

• 1. Cut and optimize the Statutory Liquidity Ratio (SLR): Cutting the SLR reduces the proportion of deposits that commercial banks must hold in the form of liquid assets (like government securities). This frees up more funds for banks to lend, thereby increasing credit availability and money supply. This is an expansionist measure.

• 2. Increase the Marginal Standing Facility (MSF) Rate: The MSF rate is the rate at which banks can borrow overnight funds from the RBI against approved government securities, in an emergency. Increasing the MSF rate makes such borrowing more expensive for banks, which discourages them from borrowing and reduces liquidity in the system. This is a contractionary monetary policy measure. Therefore, the RBI would *not* do this in an expansionist policy.

• 3. Cut the Bank Rate and Repo Rate: The Bank Rate is the rate at which the RBI lends money to commercial banks without any security. The Repo Rate is the rate at which banks borrow money from the RBI by selling securities with an agreement to repurchase them. Cutting these rates makes borrowing cheaper for commercial banks, which in turn encourages them to reduce their lending rates, leading to increased borrowing by businesses and individuals, thereby stimulating economic activity. These are expansionist measures.

The question asks what the RBI would *not* do as part of an expansionist monetary policy. Based on the analysis, increasing the MSF rate is a contractionary measure.