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Q47 (IAS/2020) Economy › Money, Banking & Inflation › Monetary policy tools Official Key

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 :

Result
Your answer: —  ·  Correct: B
Explanation

The correct answer is Option 2. An expansionist monetary policy (Easy Money Policy) aims to increase liquidity in the economy to stimulate growth. This is achieved by making credit cheaper and more accessible.

  • Statement 1: RBI would cut the Statutory Liquidity Ratio (SLR) to leave more funds with banks for lending, thereby increasing money supply.
  • Statement 2: Increasing the Marginal Standing Facility (MSF) Rate makes borrowing from the RBI more expensive for banks. This is a contractionary measure used to reduce liquidity. Therefore, the RBI would not do this during an expansionist phase.
  • Statement 3: Cutting the Bank Rate and Repo Rate reduces the cost of borrowing for commercial banks, encouraging them to lower lending rates for consumers, which aligns with expansionist goals.

Since the question asks what the RBI would not do, only Statement 2 is correct.

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Don’t just practise – reverse-engineer the question. This panel shows where this PYQ came from (books / web), how the examiner broke it into hidden statements, and which nearby micro-concepts you were supposed to learn from it. Treat it like an autopsy of the question: what might have triggered it, which exact lines in the book matter, and what linked ideas you should carry forward to future questions.
Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do ? 1. Cut and optimize the Statutory L…
At a glance
Origin: From standard books Fairness: High fairness Books / CA: 10/10 · 0/10

This is a foundational 'Sitter' question. It tests the core logic of Monetary Policy: Expansionary = Lower Rates/Ratios = More Money Supply. The only challenge is the 'NOT' in the question stem, which is a classic attention trap, not a knowledge gap.

How this question is built

This question can be broken into the following sub-statements. Tap a statement sentence to jump into its detailed analysis.

Statement 1
Would the Reserve Bank of India (RBI), when pursuing an expansionary monetary policy, cut and optimize the Statutory Liquidity Ratio (SLR)?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CASH RESERVE RATIO (CRR) vs STATUTORY LIQUIDITY RATIO (SLR) > p. 169
Presence: 4/5
“Both the reserve requirement tools are used by the Reserve Bank of India (RBI) to regulate the supply of money in the economy. However: CRR is maintained as a percentage of the Demand and Time Liabilities (DTL), whereas SLR is maintained as a percentage of the Net Demand and Time Liabilities (NDTL).”
Why this source?
  • Identifies CRR and SLR as reserve-requirement tools the RBI uses to regulate the money supply.
  • Implies adjustments in these ratios alter available bank funds and thus monetary conditions.
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
Presence: 5/5
“Apart from the CRR, banks are also required to keep some reserves in liquid form in the short term. This ratio is called Statutory Liquidity Ratio or SLR. In our fictional example, suppose CRR = 20 per cent, then with deposits of Rs 100, our bank will need to keep Rs 20 (20 per cent of 100) as cash reserves. Only the remaining amount of deposits, i.e., Rs 80 (100 – 20 = 80) can be used to give loans. The statutory requirement of the reserve ratio acts as a limit to the amount of credit that banks can create.”
Why this source?
  • Explains SLR limits the amount of deposits banks can use to give loans, directly constraining credit creation.
  • Lowering such a constraint would increase banks' capacity to lend, consistent with expansionary aims.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
Presence: 3/5
“is called CRR. "In terms of Section 42(1) of the RBI Act, 1934 the Reserve Bank, having regard to the needs of securing the monetary stability in the country, prescribes the CRR for SCBs without any floor or ceiling rate". Statutory Liquidity Ratio (SLR) The amount of reserves that the scheduled commercial banks are required to maintain with themselves on a daily basis in safe and liquid assets such as government securities, gold and cash with respect to their NDTL is called SLR. Excess CRR balances are also treated as liquid assets for the purpose of SLR i.e., SLR can be maintained as cash balance with RBI.”
Why this source?
  • Defines SLR as reserves held in liquid assets against NDTL, clarifying its mechanical role in bank reserves.
  • Shows that changing SLR changes the portion of deposits locked in liquid assets versus available for lending.
Statement 2
Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve increasing the Marginal Standing Facility (MSF) rate?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
Presence: 5/5
“But under MSF, banks can borrow from RBI by dipping into the SLR reserve. This means that the banks can keep 2% of the SLR securities with RBI (i.e., the SLR can go down up to 2% below the normal SLR requirement) and can borrow cash from RBI. This is called Marginal Standing Facility (MSF). MSF Rate = Repo Rate + 0.25%”
Why this source?
  • Defines MSF rate as Repo Rate + 0.25%, so MSF moves mechanically with repo rate.
  • If policy actions change the repo rate, the MSF rate will change in the same direction (offset by +25 bps).
Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > LONG TERM REPO OPERATIONS (LTROs) > p. 167
Presence: 4/5
“Money and Banking 7.11 (NDTL) outstanding at the end of second preceding fortnight, against government securities as collateral. This facility is in addition to loans on repo rate. The minimum amount which can be accessed through MSF is ₹1 crore and in multiples of ₹1 crore. The rate of interest under MSF is 25 basis points (i.e. 0.25%) above the repo rate. MSF rate of interest on 5 February 2021 stood at 4.25 per cent. The borrowing limit of 2 per cent of the Net Demand and Time Liabilities (NDTL) under MSF has been increased to 3 per cent by RBI in April 2020 as one of the measures to reduce the economic impact of COVID-19.”
Why this source?
  • Restates that MSF interest is 25 basis points above the repo rate and gives a concrete example.
  • Confirms the fixed spread relationship, reinforcing that an MSF increase implies an underlying repo increase.
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Steps taken by RBI under Aatma Nirbhar Bharat > p. 248
Presence: 4/5
“• Reduction in repo rate from earlier 5% to 4%• Cash Reserve Ratio (CRR) was reduced from 4% to 3%• MSF borrowing increased up to 3% of SLR from the earlier limit of 2% of SLR.• RBI allowed the banks to defer payment of EMIs for 6 months on various categories of loans without being downgraded these loan papers to NPA• RBI conducted (variable rate) Long Term Repo Operation (LTRO) worth Rs. 1 lakh crore.• RBI provided special refinance facilities for a total amount of Rs. 50,000 crores to NABARD, SIDBI and NHB to enable them to meet sectoral credit needs.• Ways and Means Advance (WMA) limit of Centre and States increased”
Why this source?
  • Records an actual policy instance where RBI reduced the repo rate (a measure to support growth), illustrating expansionary action via repo cuts.
  • By showing repo reduction as an expansionary step, it implies expansionary policy would lower, not raise, MSF (since MSF = repo + 0.25%).
Statement 3
Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve cutting the Bank Rate and the Repo Rate?
Origin: Direct from books Fairness: Straightforward Book-answerable
From standard books
Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > 3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY > p. 43
Presence: 5/5
“This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate. The Reserve Bank of India conducts repo and reverse repo operations at various maturities: overnight, 7-day, 14- day, etc. This type of operations have now become the main tool of monetary policy of the Reserve Bank of India. The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India. 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.”
Why this source?
  • Explains RBI influences money supply by changing the Bank Rate.
  • States increasing Bank Rate makes loans more expensive and reduces money supply — implying cutting it would raise money supply (expansionary).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
Presence: 4/5
“1. Repo Rate: The interest rate at which the RBI provides overnight liquidity up to a certain limit (0.25% of their NDTL) to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF). Repo is short form of "Repurchase Agreement". When banks borrow from RBI at repo rate, banks keep Government securities with RBI and get cash in return, with a promise that they will return (after overnight) this cash to RBI and RBI will return the government securities to banks. Repo Rate is also called the "Policy Rate". 2. Reverse Repo Rate: The interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.”
Why this source?
  • Defines the Repo Rate as the policy rate at which RBI provides overnight liquidity to banks.
  • Identifies repo as the benchmark/policy rate whose change alters the cost of funds for banks, so cutting it eases liquidity (expansionary).
Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > Transmission of Repo Rate into Lending Rate > p. 89
Presence: 4/5
“When RBI changes the repo rate, reverse repo rate automatically changes (reverse repo rate = repo rate – 0.25%). This means that the rate at which banks earn interest by keeping their excess funds with RBI changes. This also impacts the rate at which money (debt papers) is being traded in the money market i.e., "call money rate". This is because if a bank can earn interest rate equal to "reverse repo rate" by keeping its funds with RBI which is totally risk free then they will charge higher interest rate for funds lent in the money market. When the rate in the money market changes then banks also change their deposit rates.”
Why this source?
  • Shows changes in the Repo Rate alter reverse repo and money‑market rates.
  • Explains transmission from repo changes into deposit and lending rates, implying a repo cut loosens monetary conditions.
Pattern takeaway: UPSC Economy questions prioritize 'Direction of Change' over static definitions. They rarely ask 'What is Repo?'; they ask 'If Repo increases, what happens to liquidity?'. Master the cause-and-effect chain.
How you should have studied
  1. [THE VERDICT]: Sitter. Directly solvable from NCERT Class XII Macroeconomics (Chapter 3) or Vivek Singh (Chapter 2).
  2. [THE CONCEPTUAL TRIGGER]: Monetary Policy Tools & Transmission. The fundamental equation: Interest Rates ∝ 1 / Money Supply.
  3. [THE HORIZONTAL EXPANSION]: Don't just stop at Repo/SLR. Master the directional impact of: OMO (Purchase = Expansion), CRR (Cut = Expansion), SDF (Cut = Expansion), Margin Requirements (Decrease = Expansion), and 'Operation Twist' (Yield management).
  4. [THE STRATEGIC METACOGNITION]: Always simulate the Central Bank's intent. Ask: 'If I want to flood the market with cash to boost growth, do I make loans cheaper or expensive?' This single logic solves 90% of banking questions.
Concept hooks from this question
📌 Adjacent topic to master
S1
👉 Statutory Liquidity Ratio (SLR): definition and effect on bank lending
💡 The insight

SLR is the mandated fraction of deposits banks must hold in liquid assets, which directly limits funds available for lending.

High-yield for monetary policy questions: understanding SLR explains how central bank actions change credit supply and bank lending. Connects to bank balance-sheet mechanics, money multiplier effects, and policy transmission channels—useful for questions on liquidity, credit growth and policy responses.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > INCREMENTAL CASH RESERVE RATIO > p. 168
🔗 Anchor: "Would the Reserve Bank of India (RBI), when pursuing an expansionary monetary po..."
📌 Adjacent topic to master
S1
👉 Reserve requirements as monetary policy tools (CRR vs SLR)
💡 The insight

CRR and SLR are reserve-requirement instruments the RBI uses to regulate money supply and liquidity.

Candidates must distinguish instruments and their operational effects when assessing expansionary vs contractionary measures. Mastery enables answering policy-change questions and linking central bank choices to outcomes like lending rates and money supply.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > CASH RESERVE RATIO (CRR) vs STATUTORY LIQUIDITY RATIO (SLR) > p. 169
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 63
🔗 Anchor: "Would the Reserve Bank of India (RBI), when pursuing an expansionary monetary po..."
📌 Adjacent topic to master
S1
👉 SLR and liquidity management (interaction with LCR/HQLA)
💡 The insight

SLR holdings overlap with high-quality liquid assets, affecting banks' ability to meet liquidity coverage requirements while optimising lending.

Understanding this trade-off is important for questions on regulatory constraints versus policy easing; it links prudential regulation to monetary policy transmission and explains why authorities may 'optimise' SLR rather than only cut it.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 8: Financial Market > LIQUIDITY COVERAGE RATIO > p. 236
  • Macroeconomics (NCERT class XII 2025 ed.) > Chapter 3: Money and Banking > Cash Reserve Ratio (CRR) = Percentage of deposits which a bank must keep as cash reserves with the bank. > p. 40
🔗 Anchor: "Would the Reserve Bank of India (RBI), when pursuing an expansionary monetary po..."
📌 Adjacent topic to master
S2
👉 MSF rate linkage to the repo rate
💡 The insight

The MSF rate is set as the repo rate plus a fixed 25 basis points, so changes in repo automatically affect MSF.

High-yield for UPSC questions on interest-rate instruments: understanding the fixed spread simplifies reasoning about how policy rate moves transmit to emergency/overnight borrowing costs. Connects to questions on the LAF corridor, liquidity management, and transmission of monetary policy.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > LONG TERM REPO OPERATIONS (LTROs) > p. 167
🔗 Anchor: "Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve ..."
📌 Adjacent topic to master
S2
👉 Monetary easing (expansionary policy)
💡 The insight

Monetary easing refers to policy measures that increase money supply and typically include lowering policy rates such as the repo.

Core concept for monetary policy questions: explains the objectives and typical instruments of expansionary policy, links to macro objectives (growth vs inflation), and helps eliminate options in MCQs about rate-direction effects.

📚 Reading List :
  • Indian Economy, Nitin Singhania .(ed 2nd 2021-22) > Chapter 7: Money and Banking > MONETARY POLICY IN INDIA > p. 165
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 7: Indian Economy after 2014 > Steps taken by RBI under Aatma Nirbhar Bharat > p. 248
🔗 Anchor: "Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve ..."
📌 Adjacent topic to master
S2
👉 Policy corridor: SDF floor and MSF ceiling
💡 The insight

The policy corridor places SDF as the floor, repo in the middle, and MSF as the upper end, so MSF is the ceiling rate for overnight liquidity.

Useful for questions on liquidity management and the central bank's operating framework: knowing the corridor clarifies which rates constrain market rates and how policy rate adjustments affect market borrowing/lending.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 62
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
🔗 Anchor: "Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve ..."
📌 Adjacent topic to master
S3
👉 Repo Rate as the Policy Rate
💡 The insight

Repo Rate is the RBI's benchmark policy rate that sets the cost of overnight funds to banks and guides monetary stance.

High-yield for UPSC because questions often ask how RBI alters liquidity and inflation via policy rate decisions; connects to MPC decisions, liquidity operations, and inflation targeting; enables answering policy-change and transmission-mechanism questions.

📚 Reading List :
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > The following are the major instruments/tools that RBI uses for conducting its monetary policy: > p. 61
  • Indian Economy, Vivek Singh (7th ed. 2023-24) > Chapter 2: Money and Banking- Part I > 2.13 Monetary Policy > p. 60
🔗 Anchor: "Does an expansionary monetary policy by the Reserve Bank of India (RBI) involve ..."
🌑 The Hidden Trap

The 'Policy Corridor' evolution. While MSF is the ceiling, the floor has shifted from Reverse Repo to the Standing Deposit Facility (SDF). A future question will likely test the difference between SDF (no collateral required) and Reverse Repo (collateral required).

⚡ Elimination Cheat Code

The 'Inverse Rule' + 'NOT' Trap. Logic: To Expand the economy, you must Contract the rates (Cut). To Contract the economy, you must Expand the rates (Hike).

Statement 2 says 'Increase' (Hike). This contradicts Expansion.
Question asks what it would *NOT* do.
Therefore, Statement 2 is the answer. Option (B).

🔗 Mains Connection

Mains GS-3 (Inclusive Growth vs. Inflation): Expansionary policy fuels growth (GDP) but risks importing inflation and depreciating the Rupee. Use this trade-off when discussing the Monetary Policy Committee's (MPC) stance changes (e.g., 'Withdrawal of Accommodation').

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SIMILAR QUESTIONS

IAS · 2017 · Q11 Relevance score: -1.78

Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC) ? 1. It decides the RBI's benchmark interest rates. 2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 3. It functions under the chairmanship of the Union Finance Minister. Select the correct answer using the code given below :

IAS · 2015 · Q22 Relevance score: -4.35

When the Reserve Bank of India reduces the Statutory Liquidity Ratio by 50 basis points, which of the following is likely to happen?

IAS · 1995 · Q27 Relevance score: -5.01

As part of the liberalisation programme and with a view to attracting foreign exchange, the Government and the RBI have devised two schemes known as FCNR-’A’ and FCNR-’B’. Which of the following is/are true regarding these two schemes ? I. Under scheme ‘A’ RBI bears exchange rate fluctuations. II. Under scheme ‘B’, other banks are to meet out the difference in exchange rate fluctuations. III. Both the schemes stand withdrawn now. IV. Only scheme ‘A’ has been withdrawn. Select the correct answer from the codes given below : Codes :

IAS · 2012 · Q100 Relevance score: -5.20

The Reserve Bank of India (RBI) acts as a bankers’ bank. This would imply which of the following? 1. Other banks retain their deposits with the RB I. 2. The RBI lends funds to the commercial banks in times of need. 3. The RBI advises the commercial banks on monetary matters. Select the correct answer using the codes given below:

CDS-I · 2024 · Q42 Relevance score: -5.22

Consider the following statements regarding instruments of monetary policy : 1. Standing deposit facility (SDF) rate was introduced in April 2022. 2. SDF rate replaced fixed reverse repo rate as the floor of the LAF corridor. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2