Economics • Banking & FinanceMedium
What is the primary function of the 'Standing Liquidity Facility (SLF)' provided by the Reserve Bank of India?
A. To provide short-term funding support to primary dealers, state governments, and specialized financial institutions during liquidity squeezes.✓ Correct Answer
B. To inject long-term capital into failing commercial banks under the prompt corrective action framework.
C. To finance infrastructure projects directly through treasury bill allocations.
D. To purchase foreign exchange reserves from commercial banks to stabilize currency fluctuations.
💡 Solution & Explanation
The Standing Liquidity Facility is an operational tool deployed by the Reserve Bank of India to extend short-term funding support to specialized financial institutions like primary dealers and state governments facing temporary cash flow mismatches. Unlike long-term recapitalization bonds, this facility addresses immediate liquidity squeezes in the financial system through repo-backed windows. The RBI frequently utilizes such liquidity management instruments to maintain stability in the overnight money markets and control inter-bank lending rates.
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