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Question

Difficulty: EasyMonetary Policy Framework, RBI Mechanisms, Banking System, and Financial Markets

Which of the following instruments is used by the Reserve Bank of India (RBI) to absorb surplus liquidity from commercial banks without offering government securities as collateral?

  1. Standing Deposit Facility (SDF)Answer
  2. B
    Marginal Standing Facility (MSF)
  3. C
    Repo Rate
  4. D
    Open Market Operations (OMO) Purchase

Answer

Standing Deposit Facility (SDF) is the monetary tool used by the RBI to absorb surplus liquidity from commercial banks without providing collateral securities.
The Standing Deposit Facility (SDF) is an uncollateralized liquidity absorption instrument introduced by the RBI to strengthen monetary policy implementation by allowing banks to deposit excess liquidity without receiving government securities as collateral.

Step-by-Step Solution

1
Identify the primary objective of the tool mentioned in the stem.
The objective is liquidity absorption without pledging collateral securities by the RBI.
Different RBI instruments have distinct collateral requirements and liquidity direction (injection vs absorption).
2
Evaluate the mechanism of the Standing Deposit Facility (SDF).
SDF introduced in 2022 allows the RBI to absorb excess funds from commercial banks without providing government securities as collateral.
Unlike traditional Reverse Repo which requires collateral transfer, SDF is explicitly uncollateralized.

Key Concept

Standing Deposit Facility (SDF)
Estimated Time:45s
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Topics

Monetary Policy Framework, RBI Mechanisms, Banking System, and Financial Markets