economics hard True/False

The 'Standing Deposit Facility' (SDF) introduced by the RBI allows banks to park surplus overnight funds with the central bank without pledging any collateral, and it serves as the floor of the Liquidity Adjustment Facility (LAF) corridor.

  1. True
  2. False

Answer: True

Prior to the SDF, the RBI had to use the Reverse Repo rate to absorb liquidity, which required banks to pledge government securities as collateral. When the system was flush with massive excess liquidity, banks ran out of collateral to pledge. The SDF was introduced as a collateral-free absorption tool, typically set 25 basis points below the Repo Rate, effectively establishing the absolute lower bound (floor) for short-term interbank interest rates.

Topic Banking - Monetary Policy
Exam Relevance Banking, UPSC Prelims, SSC
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