WBCS.LIVE practice question

What does the 'Standing Deposit Facility' (SDF) introduced by the RBI do?

Solve this multiple-choice question and check the correct answer with its explanation below.

Answer options

  1. It provides long-term loans to commercial banks.
  2. It absorbs excess liquidity without requiring collateral.
  3. It regulates the foreign exchange reserves.
  4. It provides emergency funding to cooperative societies.

Correct answer and explanation

Correct answer: It absorbs excess liquidity without requiring collateral.

Explanation: āœ… Correct Answer: B) It absorbs excess liquidity without requiring collateral. šŸ“š Explanation: The Standing Deposit Facility (SDF) was officially introduced by the Reserve Bank of India in April 2022 as a highly agile monetary policy tool. It allows the RBI to rapidly absorb massive amounts of excess liquidity from commercial banks without the rigid requirement of providing government securities as collateral. This effectively strengthens the central bank's control over runaway inflation.