Economics • Banking & FinanceMedium
Under the regulatory framework of the Reserve Bank of India, what is the primary role of the 'Standing Deposit Facility (SDF)'?
A. To provide overnight emergency liquidity loans to commercial banks against government securities
B. To absorb excess liquidity from the banking system without requiring banks to pledge collateral securities✓ Correct Answer
C. To regulate foreign exchange reserves held by scheduled commercial banks
D. To finance long-term infrastructure projects undertaken by state-owned enterprises
💡 Solution & Explanation
The Standing Deposit Facility allows the Reserve Bank of India to absorb excess liquidity from commercial banks without requiring them to pledge government securities as collateral. Unlike the traditional repo or reverse repo mechanisms, this instrument offers a flexible rate below the repo rate for overnight liquidity management.
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