Economics • Banking & FinanceHard
What is the primary operational mechanism of the 'Standing Deposit Facility (SDF)' introduced by the Reserve Bank of India as part of the liquidity management framework?
A. It absorbs excess liquidity from commercial banks without requiring the central bank to provide government securities as collateral✓ Correct Answer
B. It provides collateralized emergency lending to non-banking financial companies at sub-repo interest rates
C. It mandates corporate depositors to maintain minimum balances in foreign currency non-resident accounts
D. It facilitates long-term infrastructure refinancing through tax-free bonds issued by public sector undertakings
💡 Solution & Explanation
The Standing Deposit Facility is a fixed-rate absorption tool introduced to absorb surplus liquidity from the commercial banking system without the Reserve Bank of India needing to pledge collateral securities. Recommended by the Urjit Patel Committee, it strengthens the central bank's liquidity management by removing the collateral constraint that previously limited reverse repo operations. Participating banks earn interest on funds parked overnight through this facility.
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