Economics • Banking & FinanceMedium
What is the main purpose of the 'Standing Deposit Facility (SDF)' introduced by the RBI?
A. To absorb excess liquidity from commercial banks without requiring government securities as collateral✓ Correct Answer
B. To provide emergency overnight loans to systemically important banks
C. To subsidize agricultural loans given by rural cooperative banks
D. To finance long-term infrastructure bonds issued by public sector undertakings
💡 Solution & Explanation
The Standing Deposit Facility introduced by the Reserve Bank of India operates as a collateral-free liquidity management instrument designed to absorb surplus funds directly from commercial banks. Under this mechanism, banks can park excess overnight liquidity with the central bank without needing to pledge government securities as collateral, thereby offering greater flexibility in interest rate management. Unlike standard repo windows, SDF enhances the RBI's ability to manage monetary inflation smoothly.
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