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Question

……………………………………………. allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks

A Margin Deposit Facility Correct Answer Incorrect Answer
B Standing Deposit Facility Correct Answer Incorrect Answer
C Liquidity Adjustment Facility Correct Answer Incorrect Answer
D Repo Rate Correct Answer Incorrect Answer
E Variable Reverse Repo Correct Answer Incorrect Answer

Solution

Standing Deposit Facility allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks. In the present situation, the main arrangement for the RBI to absorb excess money with the banking system is the famous reverse repo mechanism. Under reverse repo (which is a part of the Liquidity Adjustment Facility), banks will get government securities in return when they give excess cash to the RBI.  An interest rate of reverse repo rate is also provided to banks

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