Correct Option
An expansionary monetary policy by the Reserve Bank of India (RBI) seeks to increase the money supply in the economy and reduce borrowing costs to stimulate economic activity. Among the given options:
- Statement 2: Increasing the Marginal Standing Facility (MSF) rate makes overnight borrowing more expensive for commercial banks. This action tightens liquidity conditions and discourages lending, which is characteristic of a contractionary monetary policy. Therefore, the RBI would not increase the MSF rate when adopting an expansionary policy.
Incorrect Options
- Statement 1: Cutting the Statutory Liquidity Ratio (SLR) reduces the proportion of deposits that commercial banks must hold as liquid assets. This action releases more funds for banks to lend, thereby increasing the money supply and promoting credit growth. This is an expansionary measure.
- Statement 3: Cutting the Bank Rate and Repo Rate lowers the cost at which commercial banks can borrow funds from the RBI. This encourages banks to borrow more and subsequently reduce their lending rates, increasing credit availability and money supply in the economy. This is also an expansionary measure.
Since the RBI would undertake actions mentioned in statements 1 and 3 during an expansionary policy, only statement 2 represents an action the RBI would not do. Hence, option (b) is the correct answer.