What is the primary operational objective of the 'Standing Deposit Facility' (SDF) introduced by the Reserve Bank of India under amendments to the RBI Act, 1934?

💡 Solution & Explanation

The Standing Deposit Facility serves as a financial tool enabling the Reserve Bank of India to absorb excess liquidity from commercial banks without collateral requirements. Prior to the introduction of SDF, the central bank had to provide eligible government securities from its portfolio as collateral when absorbing liquidity under the fixed-rate reverse repo window, which constrained liquidity management capacity during periods of massive capital inflows. SDF operates at an interest rate below the policy repo rate, forming the lower bound of the liquidity adjustment facility corridor. A related liquidity management instrument is the Variable Rate Reverse Repo auction.