Economics • Banking & FinanceHard
Analyze the operational mechanics of the 'Standing Deposit Facility (SDF)' introduced by the Reserve Bank of India. How does it differ from the traditional reverse repo mechanism?
A. SDF requires banks to pledge eligible government securities as collateral when parking funds with the central bank
B. SDF allows the RBI to absorb liquidity without requiring banks to provide government securities as collateral✓ Correct Answer
C. SDF is a lending facility used exclusively by foreign banks operating in metropolitan financial centers
D. SDF operates at a floating interest rate determined daily through competitive interbank auctions
💡 Solution & Explanation
The Standing Deposit Facility is a collateral-free liquidity absorption tool that enables the Reserve Bank of India to absorb excess liquidity from commercial banks without needing to pledge government securities. This overcomes previous collateral constraints that limited the volume of liquidity the RBI could mop up during surplus conditions. The SDF rate is maintained above the fixed rate reverse repo under the liquidity adjustment facility corridor.
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