Economics • Banking & FinanceHard
Analyze the operational mechanics of the 'Standing Deposit Facility' introduced by the Reserve Bank of India. How does it modify the central bank's liquidity absorption framework?
A. It permits the central bank to absorb liquidity from commercial banks without needing to pledge government securities as collateral, operating as an absorptive counterpart to the marginal standing facility.✓ Correct Answer
B. It forces commercial banks to park a fixed percentage of foreign exchange earnings in overseas escrow accounts.
C. It provides penalty-free long-term credit to rural cooperative banks experiencing seasonal deposit outflows.
D. It replaces the traditional cash reserve ratio by mandating physical gold deposits at central bank vaults.
💡 Solution & Explanation
The standing deposit facility allows the Reserve Bank of India to absorb excess liquidity from commercial banks without collateral requirements, strengthening its ability to manage interest rate corridors. Alternative descriptions involve foreign exchange management or physical gold deposits unrelated to this liquidity tool. Recommended by the Urjit Patel committee, it gives monetary authorities flexibility in managing surplus cash.
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