Question

    Which of the following facility allows the RBI to absorb excess cash from the economy by sucking liquidity from commercial banks without giving government securities in return to the lenders?

    A Standing deposit facility Correct Answer Incorrect Answer
    B Marginal standing facility Correct Answer Incorrect Answer
    C Terminal standing facility Correct Answer Incorrect Answer
    D Financial deposit facility Correct Answer Incorrect Answer
    E None of these Correct Answer Incorrect Answer

    Solution

    Standing deposit facility (SDF), allows the RBI to absorb excess cash from the economy by sucking liquidity from commercial banks without giving government securities in return to the lenders.. Reserve Bank of India introduced a standing deposit facility (SDF) at 3.75% which would serve as the floor for the policy corridor. With this, the width of the policy corridor was narrowed to 50 basis points (bps) from 65 bps. With the marginal standing facility (MSF) at the upper end of the policy corridor at 4.25%, the SDF will make up the duo of standing facilities – one to absorb and the other to inject liquidity. The use of the SDF and the MSF will be left to the discretion of banks, and will be available after market hours on all days of the week. RBI did extend an olive branch to the markets by raising the ceiling for government securities that can be held to maturity (HTM) to 23% from 22% up to March 31, 2023. The restoration of the 19.5% cap on HTM securities will be made in a phased manner starting from Q1FY24. 80% of the total liquidity absorbed under the liquidity adjustment facility during Q4FY22 has firmed up close to the policy repo rate due to the increased use of variable reverse repo rate (VRRR) auctions.

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