Economics • Banking & FinanceMedium
What does the term 'Standing Deposit Facility (SDF)' introduced by the Reserve Bank of India signify in monetary management?
A. An uncollateralized liquidity absorption tool that allows the central bank to absorb excess funds without pledging government securities✓ Correct Answer
B. A standing credit facility provided to scheduled commercial banks against collateral during liquidity crunches
C. A long-term foreign currency deposit scheme for non-resident Indians administered through public sector banks
D. A statutory reserve requirement maintained by cooperative banks in government treasury bills
💡 Solution & Explanation
The Standing Deposit Facility is an uncollateralized liquidity absorption tool added to the liquidity adjustment facility framework, enabling the Reserve Bank of India to absorb excess liquidity from commercial banks without needing eligible collateral securities. Distractors confuse it with collateralized lending windows or non-resident foreign currency deposit schemes. Operating without collateral eliminates the collateral constraint that previously limited the central bank's liquidity absorption capacity. This instrument became part of the monetary policy toolkit following amendments to the Reserve Bank of India Act, 1934.
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