Monetary Policy

Choose the Correct Answer

Correct Answer : Option b

Explanation
Statement 1 is correct : The Standing Deposit Facility (SDF) allows the RBI to absorb liquidity from commercial banks without requiring any collateral, unlike other tools such as the Reverse Repo, which requires collateral. The SDF is a mechanism introduced to absorb excess liquidity, and it operates without collateral backing.

Statement 2 is correct : The Reverse Repo Facility (RRR) involves the RBI absorbing liquidity by borrowing funds from commercial banks, and it requires the RBI to provide government securities as collateral in return. This is a key feature of reverse repos.

Statement 3 is not correct : The SDF is actually a short-term liquidity absorption tool. It’s a tool that helps manage short-term liquidity fluctuations, whereas the Reverse Repo Facility can be used for both short-term and longer-term liquidity absorption, depending on the tenure of the reverse repo operation.