Economics • Banking & FinanceMedium
What is the primary objective of the 'Standing Deposit Facility (SDF)' introduced by the RBI?
A. To absorb liquidity from the banking system without requiring government securities as collateral✓ Correct Answer
B. To provide long-term capital support to failing NBFCs
C. To mandate foreign banks to maintain reserves abroad
D. To finance infrastructure projects directly through retail deposits
💡 Solution & Explanation
The Standing Deposit Facility allows the Reserve Bank of India to absorb liquidity from commercial banks without providing government securities as collateral, operating as a fixed-rate tool. Distractors involving long-term capital support or direct retail financing misrepresent this short-term monetary management instrument. This facility was recommended by the Urjit Patel committee to strengthen the central bank's liquidity framework. It serves as an effective floor for the interest rate corridor in the economy.
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