Economics • Banking & FinanceHard
What is the function of the 'Standing Deposit Facility (SDF)' introduced by the RBI?
A. To absorb excess liquidity from commercial banks without requiring collateral.✓ Correct Answer
B. To provide overnight emergency loans against government securities.
C. To finance long-term infrastructure projects undertaken by state governments.
D. To subsidize interest rates for micro, small, and medium enterprises.
💡 Solution & Explanation
The Standing Deposit Facility is a collateral-free liquidity absorption tool introduced by the Reserve Bank of India to mop up excess liquidity from the banking system as part of the Liquidity Adjustment Facility. Unlike traditional reverse repo operations, it does not require eligible collateral securities for absorption. This instrument is a key inclusion in modern central banking monetary policy tools.
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