Economics • Banking & FinanceHard
Analyze the operational mechanics of the 'Standing Deposit Facility' introduced by the Reserve Bank of India. How does it differ from the traditional reverse repo mechanism?
A. It requires commercial banks to pledge eligible government securities as collateral when parking surplus funds with the central bank.
B. It allows the central bank to absorb liquidity from commercial banks without requiring them to pledge government securities as collateral.✓ Correct Answer
C. It provides emergency overnight financial accommodation to insolvent banking institutions facing systemic runs.
D. It mandates a fixed lending rate applicable exclusively to foreign institutional investors operating in debt markets.
💡 Solution & Explanation
The Standing Deposit Facility is a collateral-free liquidity absorption tool where the Reserve Bank of India absorbs surplus liquidity from commercial banks without needing to provide government securities as collateral. This instrument was incorporated into the Reserve Bank of India Act following an amendment, strengthening the central bank's liquidity management framework. Traditional reverse repo operations require banks to transfer eligible securities to the central bank.
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