Economics • Banking & FinanceMedium
What is the primary purpose of the 'Standing Deposit Facility (SDF)' introduced by the Reserve Bank of India?
A. To absorb excess liquidity from commercial banks on an overnight basis without requiring the banks to provide government securities as collateral.✓ Correct Answer
B. To provide long-term infrastructural loans to public sector undertakings at concessional rates.
C. To manage foreign exchange reserves through swap agreements with international central banks.
D. To regulate microfinance institutions and rural self-help groups.
💡 Solution & Explanation
The Standing Deposit Facility serves as an uncollateralized liquidity absorption tool enabling the Reserve Bank of India to soak up excess funds directly from commercial banks overnight. Unlike traditional repo operations, it does not require banks to pledge government securities as collateral. This instrument gives monetary authorities greater flexibility in managing short-term interest rates.
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