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    Question

    The introduction of the Standing Deposit Facility (SDF)

    by the RBI marked a shift from ________ liquidity absorption to a _________ mechanism.
    A Collateral-based → Collateral-free Correct Answer Incorrect Answer
    B Fixed-rate → Market-rate Correct Answer Incorrect Answer
    C Short-term → Long-term Correct Answer Incorrect Answer
    D Discretionary → Formulaic Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    Earlier, excess liquidity was absorbed mainly through Reverse Repo (fixed rate). With SDF, RBI absorbs liquidity without collateral and allows market-based absorption. This makes liquidity operations more dynamic and reduces dependence on securities.

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