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Consider the following statements about the Standing Deposit Facility (SDF):
It is an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral.
  • The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor.
  • Deposits under the SDF will be eligible for qualification as both Cash Reserve Ratio and Statutory Liquidity Ratio.
    Which of the statements given above is/are correct?
    • a)
      1 only
    • b)
      2 and 3 only
    • c)
      1 and 2 only
    • d)
      1, 2 and 3
    Correct answer is option 'C'. Can you explain this answer?
    Most Upvoted Answer
    Consider the following statements about the Standing Deposit Facility...
    • In 2018, the Government amended the RBI Act (1934), empowering the RBI to introduce the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy. The SDF is also a financial stability tool, in addition to its role in liquidity management.
    • The interest rate on the SDF facility will be 25 basis points less than the Repo Rate. (Currently, as the Repo Rate stands at 4%, hence the SDF interest rate stands at 3.75%).
    • The SDF will replace the fixed rate reverse repo as the floor of the LAF (Liquidity Adjustment Facility) corridor. Both the standing facilities, viz., the MSF (Marginal Standing Facility) and the SDF, will be available on all days of the week, throughout the year.
    • The Fixed Rate Reverse Repo (FRRR) rate is retained at 3.5%. It will remain as part of the RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time. The FRRR, along with the SDF, will impart flexibility to the RBI’s liquidity management framework. Tenor: Under the SDF, the LAF eligible entities can place deposits with the RBI on an overnight basis. The RBI, however, retains the flexibility to absorb liquidity for longer tenors under the SDF with appropriate pricing, as and when the need arises.
    • CRR and SLR eligibility: Deposits under the SDF shall not be reckoned as balances eligible for the maintenance of the Cash Reserve Ratio (CRR), under Section 42 of the RBI Act, 1934, but shall be an eligible asset for the maintenance of the Statutory Liquidity Ratio (SLR), under Section 24 of the Banking Regulation Act, 1949.
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    Community Answer
    Consider the following statements about the Standing Deposit Facility...
    Explanation:

    Statement 1:
    - The first statement is correct. The Standing Deposit Facility (SDF) is indeed an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral. This facility allows banks to park excess funds with the RBI at a predetermined interest rate without the need for any collateral.

    Statement 2:
    - The second statement is incorrect. The SDF does not replace the Fixed Rate Reverse Repo (FRRR) as the floor of the Liquidity Adjustment Facility (LAF) corridor. The FRRR is a tool used by the RBI to inject or absorb liquidity in the banking system.

    Statement 3:
    - The third statement is correct. Deposits under the SDF are eligible for qualification as both Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). CRR is the portion of deposits that banks are required to maintain with the RBI in cash, while SLR is the amount of funds that banks are required to maintain in the form of liquid assets such as cash, gold, or government securities.
    Therefore, the correct answer is option C as statements 1 and 3 are correct.
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    Consider the following statements about the Standing Deposit Facility (SDF): It is an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral. The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor. Deposits under the SDF will be eligible for qualification as both Cash Reserve Ratio and Statutory Liquidity Ratio. Which of the statements given above is/are correct?a)1 onlyb)2 and 3 onlyc)1 and 2 onlyd)1, 2 and 3Correct answer is option 'C'. Can you explain this answer?
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    Consider the following statements about the Standing Deposit Facility (SDF): It is an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral. The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor. Deposits under the SDF will be eligible for qualification as both Cash Reserve Ratio and Statutory Liquidity Ratio. Which of the statements given above is/are correct?a)1 onlyb)2 and 3 onlyc)1 and 2 onlyd)1, 2 and 3Correct answer is option 'C'. Can you explain this answer? for UPSC 2024 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements about the Standing Deposit Facility (SDF): It is an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral. The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor. Deposits under the SDF will be eligible for qualification as both Cash Reserve Ratio and Statutory Liquidity Ratio. Which of the statements given above is/are correct?a)1 onlyb)2 and 3 onlyc)1 and 2 onlyd)1, 2 and 3Correct answer is option 'C'. Can you explain this answer? covers all topics & solutions for UPSC 2024 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements about the Standing Deposit Facility (SDF): It is an additional tool of the Reserve Bank of India for absorbing liquidity without any collateral. The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the LAF corridor. Deposits under the SDF will be eligible for qualification as both Cash Reserve Ratio and Statutory Liquidity Ratio. Which of the statements given above is/are correct?a)1 onlyb)2 and 3 onlyc)1 and 2 onlyd)1, 2 and 3Correct answer is option 'C'. Can you explain this answer?.
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