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:

The correct option is 2 only (meaning the RBI would not increase the Marginal Standing Facility Rate when adopting an expansionist monetary policy).

Understanding Expansionist Monetary Policy:
An expansionist (or easy/accommodative) monetary policy is aimed at increasing the money supply in the economy and boosting economic activity. This is achieved by making borrowing cheaper for commercial banks and the public, thereby encouraging investment and consumption.

Analyzing the Statements:

1. Cut and optimize the Statutory Liquidity Ratio (SLR):
SLR is the minimum percentage of deposits that commercial banks must maintain in the form of liquid assets like gold or government securities. If the RBI cuts the SLR, commercial banks need to keep fewer funds locked up in these liquid assets. Consequently, banks have more money available to lend to the general public, which increases liquidity in the market. This is a classic expansionist measure, so the RBI would do this.

2. Increase the Marginal Standing Facility (MSF) Rate:
The MSF rate is the rate at which scheduled commercial banks can borrow overnight funds from the RBI against approved government securities in an emergency. If the RBI increases the MSF rate, borrowing becomes more expensive for commercial banks. To compensate, banks will increase their lending rates for consumers, which discourages borrowing and reduces the money supply in the economy. This is a contractionist (dear money) policy tool, not an expansionist one. Therefore, the RBI would not do this.

3. Cut the Bank Rate and Repo Rate:
The Repo Rate is the rate at which the RBI lends money to commercial banks against government securities, and the Bank Rate is the rate at which the RBI lends long-term funds without collateral. Cutting these rates lowers the cost of borrowing for commercial banks. Banks then pass this benefit on to consumers by lowering interest rates on loans, which stimulates credit creation and economic growth. This is an expansionist measure, so the RBI would do this.

Conclusion:
Since statements 1 and 3 are expansionist measures that the RBI would adopt, and statement 2 is a contractionist measure that the RBI would not adopt, the correct answer is 2 only.