Economics • Banking & FinanceMedium
What is the primary objective of introducing the 'Standing Deposit Facility (SDF)' by the Reserve Bank of India?
A. To provide emergency loans to non-banking financial companies
B. To absorb excess liquidity from the banking system without requiring collateral✓ Correct Answer
C. To finance the fiscal deficit of the central government directly
D. To regulate foreign institutional investments in the debt market
💡 Solution & Explanation
The Standing Deposit Facility enables the Reserve Bank of India to absorb excess liquidity from commercial banks without the requirement of providing government securities as collateral. Introduced to strengthen the monetary policy operating framework, it gives the central bank greater flexibility in managing overnight interest rates. Unlike traditional reverse repo operations, the absence of collateral requirements removes constraints on the volume of liquidity absorption.
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