CDS (I) 2024 General Knowledge · Question 30 of 120

Correct — C, Both 1 and 2. The Reserve Bank's own description of the instrument settles both statements at once. The standing deposit facility is 'the rate at which the Reserve Bank accepts uncollateralised deposits, on an overnight basis, from all LAF participants'; it was introduced in April 2022, and on introduction 'the SDF rate replaced the fixed reverse repo rate as the floor of the LAF corridor'. That is statement 1 and statement 2 in the Reserve Bank's words. The SDF rate is placed 25 basis points below the policy repo rate, with the marginal standing facility 25 basis points above it, so the corridor runs MSF at the ceiling, repo in the middle and SDF at the floor.

• (a)1 only — The April 2022 date is right, but the second half is right too — the whole point of introducing the SDF was to hand it the floor of the corridor that the fixed reverse repo rate had held.
• (b)2 only — The role is correctly described, but the date is also correct; the facility was introduced in April 2022 and has set the floor ever since.
• (d)Neither 1 nor 2 — Rejects both statements when the Reserve Bank's own account of the SDF contains both — the year of introduction and the replacement of the fixed reverse repo rate as the corridor floor.

The liquidity adjustment facility is the Reserve Bank's day-to-day window for adding or absorbing overnight liquidity, and it operates inside a corridor. The marginal standing facility rate is the ceiling, at which banks may borrow by dipping into their SLR holdings up to a limit; the policy repo rate sits in the middle; and since April 2022 the standing deposit facility rate has been the floor, at which the Reserve Bank accepts uncollateralised overnight deposits from LAF participants. The SDF sits 25 basis points below repo and the MSF 25 basis points above.

The word doing the work in this item is 'uncollateralised'. Under the old fixed reverse repo the Reserve Bank had to hand over government securities to absorb liquidity, so its ability to mop up was limited by the stock of securities it held. The SDF removed that constraint, which is why it was introduced when the system was flush with surplus liquidity, and why it could take over as the corridor floor. Candidates who remember only that 'reverse repo is the floor' answer this wrongly — that has not been true since April 2022, though the fixed reverse repo rate itself has not been abolished and remains available at the Reserve Bank's discretion. Where the numbers stand has of course moved since the exam. At the exam in April 2024 the repo rate was in a tightening-cycle plateau; as of the Monetary Policy Committee's decision of 5 August 2026 the repo rate stood at 5.25 per cent, with the SDF at 5.00 per cent and the MSF and Bank Rate at 5.50 per cent. The structure of the corridor is what the exam tests; the levels change every few months.

• The SDF was introduced in April 2022 and replaced the fixed reverse repo rate as the floor of the LAF corridor.
• The SDF is the rate at which the Reserve Bank accepts uncollateralised overnight deposits from all LAF participants.
• The SDF rate is set 25 basis points below the policy repo rate; the MSF rate is 25 basis points above it.
• The corridor runs from the MSF rate as ceiling to the SDF rate as floor, with the repo rate in the middle.
• As of 5 August 2026 the repo rate was 5.25 per cent, the SDF 5.00 per cent and the MSF and Bank Rate 5.50 per cent.

• Still naming the reverse repo rate as the floor of the corridor; that ceased to be the case in April 2022.
• Assuming the SDF is collateralised like the repo — the absence of collateral is its defining feature.
• Memorising a rate level rather than the structure; the numbers change at almost every policy meeting.

Asked as a two-statement item pairing the year of introduction with the instrument's place in the corridor, so both halves must be known.

• practice — not a real PYQ

  The standing deposit facility differs from the reverse repo chiefly in that

  • (a)it is available only to non-banking financial companies
  • (b)it requires no collateral
  • (c)it is a long-term rather than an overnight facility
  • (d)it is fixed by the Union Government

  Answer(b) it requires no collateral — the Reserve Bank accepts uncollateralised overnight deposits under the SDF.

• practice — not a real PYQ

  In the liquidity adjustment facility corridor, the ceiling is set by

  • (a)the standing deposit facility rate
  • (b)the policy repo rate
  • (c)the marginal standing facility rate
  • (d)the cash reserve ratio

  Answer(c) the marginal standing facility rate — placed 25 basis points above the repo rate, with the SDF 25 basis points below it as the floor.