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RAS question

What is the key difference between SDF and reverse repo?

Correct answer: (B) SDF does not require collateral while reverse repo does.

The key difference between the Standing Deposit Facility and reverse repo is that SDF allows the RBI to absorb liquidity without providing collateral, while reverse repo is collateral-backed.

  1. (A)

    SDF has a longer tenure

  2. (B)

    SDF does not require collateral while reverse repo does

  3. (C)

    SDF rate is higher than reverse repo

  4. (D)

    SDF is for NBFCs while reverse repo is for banks

Explanation

SDF is a collateral-free liquidity absorption facility. The RBI's April 2022 statement says the amended RBI Act empowered it to introduce SDF as an additional tool for absorbing liquidity without any collateral. That matters because, under SDF, the RBI can take surplus funds out of the banking system without handing over government securities. SDF gives the RBI more flexibility because its ability to absorb liquidity is not limited by the stock of government securities it holds. Reverse repo, by contrast, is the collateral-backed route, so the practical exam distinction is not tenure or the exact rate but the presence or absence of collateral.

Why the other options are wrong

  • (A) Tenure is not the key distinction here, because collateral-free liquidity absorption, not a longer maturity, is SDF's defining feature.
  • (C) A rate difference may exist in a particular policy setting, but the structural distinction is that SDF works without collateral while reverse repo is collateral-backed.
  • (D) Both facilities operate in relation to banks rather than reserving SDF for NBFCs.

Concept

Monetary policy operations include the RBI's liquidity absorption tools under the LAF framework. SDF recurs in RAS because small institutional differences such as collateral, corridor rates and liquidity management often decide Economy MCQs.

Source

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