CA Foundation · Business Economics · Money Market
Under the current Indian liquidity framework, which of the following correctly describes the relationship among the policy repo rate, the Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate?
The SDF rate lies below the repo rate and the MSF rate lies above it. The SDF rate forms the floor and the MSF rate the ceiling of the liquidity adjustment corridor, so overnight market rates stay between them.
- ASDF rate is below the repo rate and MSF rate is above the repo rateCorrect
- BSDF rate is above the repo rate and MSF rate is below it
- CAll three rates are always equal
- DMSF rate is below the SDF rate and the repo rate is the highest
Explanation
The corridor is built around the repo rate. The SDF rate, at which banks park surplus funds with the RBI without collateral, is set below the repo rate (25 bps below). The MSF rate is set above the repo rate (25 bps above) and forms the upper limit. Option B reverses this order.
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