UPSC Prelims Practice Questions — RBI absorbs ₹71,971 crore liquidity from banks

Q1. Consider the following statements comparing the Standing Deposit Facility (SDF) and the Marginal Standing Facility (MSF) of the Reserve Bank of India: 1. The SDF rate is placed 25 basis points below the policy repo rate, while the MSF rate is placed 25 basis points above it. 2. Under the MSF banks borrow by dipping into their Statutory Liquidity Ratio portfolio up to a predefined limit, whereas under the SDF the Reserve Bank accepts deposits without parting with government securities as collateral. 3. The MSF rate forms the lower bound of the Liquidity Adjustment Facility corridor and the SDF rate its upper bound, with the policy repo rate lying in between. Which of the statements given above is/are correct?

  1. The SDF rate is placed 25 basis points below the policy repo rate, while the MSF rate is placed 25 basis points above it.
  2. Under the MSF banks borrow by dipping into their Statutory Liquidity Ratio portfolio up to a predefined limit, whereas under the SDF the Reserve Bank accepts deposits without parting with government securities as collateral.
  3. The MSF rate forms the lower bound of the Liquidity Adjustment Facility corridor and the SDF rate its upper bound, with the policy repo rate lying in between.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q2. Consider the following statements about the instruments of monetary policy operated by the Reserve Bank of India: 1. The Liquidity Adjustment Facility comprises overnight as well as term repo and reverse repo operations at both fixed and variable rates, along with the Standing Deposit Facility and the Marginal Standing Facility. 2. Open Market Operations, being outright purchases or sales of government securities for the injection or absorption of durable liquidity, are conducted exclusively within the Liquidity Adjustment Facility window. 3. Access to the Standing Deposit Facility is restricted to scheduled commercial banks alone, all other participants in the Liquidity Adjustment Facility being ineligible to place funds under it. 4. The Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial paper, and it stands aligned with the Marginal Standing Facility rate. Which of the above is/are NOT correct?

  1. The Liquidity Adjustment Facility comprises overnight as well as term repo and reverse repo operations at both fixed and variable rates, along with the Standing Deposit Facility and the Marginal Standing Facility.
  2. Open Market Operations, being outright purchases or sales of government securities for the injection or absorption of durable liquidity, are conducted exclusively within the Liquidity Adjustment Facility window.
  3. Access to the Standing Deposit Facility is restricted to scheduled commercial banks alone, all other participants in the Liquidity Adjustment Facility being ineligible to place funds under it.
  4. The Bank Rate is the rate at which the Reserve Bank is ready to buy or rediscount bills of exchange or other commercial paper, and it stands aligned with the Marginal Standing Facility rate.
  • A. 1 and 3
  • B. 2 and 3
  • C. 2 and 4
  • D. 3 only

Q3. Consider the following statements about the Reserve Bank of India's liquidity absorption operations: 1. The Standing Deposit Facility, which replaced the fixed rate reverse repo as the floor of the Liquidity Adjustment Facility corridor, was operationalised by the Reserve Bank in April 2020. 2. Under the extant operating framework, transient liquidity is managed primarily through 7-day variable rate auctions, with other variable rate operations of tenors ranging from overnight up to 14 days. 3. In a variable rate reverse repo auction the absorption rate is discovered through competitive bidding by participants, whereas the erstwhile fixed rate reverse repo carried an administered rate announced by the Reserve Bank. 4. Variable rate reverse repo auctions can be conducted only at an overnight tenor, longer-tenor absorption being possible solely through outright open market sales of government securities. Which of the above is/are NOT correct?

  1. The Standing Deposit Facility, which replaced the fixed rate reverse repo as the floor of the Liquidity Adjustment Facility corridor, was operationalised by the Reserve Bank in April 2020.
  2. Under the extant operating framework, transient liquidity is managed primarily through 7-day variable rate auctions, with other variable rate operations of tenors ranging from overnight up to 14 days.
  3. In a variable rate reverse repo auction the absorption rate is discovered through competitive bidding by participants, whereas the erstwhile fixed rate reverse repo carried an administered rate announced by the Reserve Bank.
  4. Variable rate reverse repo auctions can be conducted only at an overnight tenor, longer-tenor absorption being possible solely through outright open market sales of government securities.
  • A. 1 and 3
  • B. 1 and 4
  • C. 2 and 4
  • D. 2, 3 and 4

Q4. Consider the following statements contrasting the variable rate reverse repo (VRRR) with the Standing Deposit Facility (SDF): 1. The reverse repo absorbs liquidity against the collateral of eligible government securities, whereas the SDF absorbs uncollateralised overnight deposits from Liquidity Adjustment Facility participants. 2. The rate at which funds are absorbed in a VRRR is arrived at through bidding, whereas funds placed under the SDF earn a rate fixed at a stated margin below the policy repo rate. 3. The VRRR is a standing facility that participants may access at their own discretion during business hours, whereas the SDF is conducted as an auction only on days notified by the Reserve Bank. Which of the statements given above is/are correct?

  1. The reverse repo absorbs liquidity against the collateral of eligible government securities, whereas the SDF absorbs uncollateralised overnight deposits from Liquidity Adjustment Facility participants.
  2. The rate at which funds are absorbed in a VRRR is arrived at through bidding, whereas funds placed under the SDF earn a rate fixed at a stated margin below the policy repo rate.
  3. The VRRR is a standing facility that participants may access at their own discretion during business hours, whereas the SDF is conducted as an auction only on days notified by the Reserve Bank.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q5. On 22 September 2026, when the Reserve Bank of India absorbed ₹71,971 crore through an overnight variable rate reverse repo auction at a cut-off of 5.24 per cent, which one of the following stood at the highest level?

  • A. The standing deposit facility rate
  • B. The policy repo rate
  • C. The cut-off rate of the said auction
  • D. The marginal standing facility rate

Q6. Consider the following statements about the Reserve Bank of India's overnight variable rate reverse repo auction of 22 September 2026 as compared with its other absorption operations that month: 1. The auction was notified for ₹75,000 crore, a quantum larger than any single variable rate reverse repo absorption recorded earlier in September 2026. 2. The cut-off rate in this auction was the same as the cut-off and weighted average rate at which the Reserve Bank had accepted variable rate reverse repo bids in its auctions of 15 and 17 September 2026. 3. Unlike those mid-September auctions, in which the bids received were accepted in full, this auction saw bids covering only about 96 per cent of the notified amount. Which of the statements given above is/are correct?

  1. The auction was notified for ₹75,000 crore, a quantum larger than any single variable rate reverse repo absorption recorded earlier in September 2026.
  2. The cut-off rate in this auction was the same as the cut-off and weighted average rate at which the Reserve Bank had accepted variable rate reverse repo bids in its auctions of 15 and 17 September 2026.
  3. Unlike those mid-September auctions, in which the bids received were accepted in full, this auction saw bids covering only about 96 per cent of the notified amount.
  • A. 1 and 2 only
  • B. 1 and 3 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q7. Under the Reserve Bank of India's special USD-INR swap window that was closed on 31 August 2026, which one of the following channels accounted for the largest share of the foreign currency inflows mobilised?

  • A. Inflows through external commercial borrowings raised by Indian corporates
  • B. Deposits placed by non-residents in the Foreign Currency Non-Resident (Bank) scheme
  • C. Overseas foreign currency borrowings raised by Indian banks
  • D. Foreign portfolio investment in government securities under the fully accessible route

Q8. With reference to the special USD-INR swap facility under which the central bank absorbed banks' hedging costs on foreign currency deposit inflows in 2026, which one of the following statements is correct?

  • A. It was introduced by the Reserve Bank of India on 8 June 2026 and covered, besides non-resident foreign currency deposits, inflows through external commercial borrowings and overseas foreign currency borrowings.
  • B. It was introduced by the Reserve Bank of India on 8 June 2026 and was confined exclusively to non-resident foreign currency deposits, every other category of foreign currency inflow being outside its scope.
  • C. It was notified by the Central Government under the Reserve Bank of India Act, 1934 and was kept open for its entire announced term, closing only at the end of September 2026.
  • D. It was introduced by the Reserve Bank of India in June 2026 and was, on its closure, made a permanent absorption window under the Liquidity Adjustment Facility.

Q9. Under the flexible inflation targeting framework given statutory basis by the amendment to the Reserve Bank of India Act in 2016, the operating target of monetary policy — which the Reserve Bank endeavours to align with the policy repo rate on a daily basis through its liquidity operations — is:

  • A. The weighted average rate of overnight transactions in the uncollateralised call money segment
  • B. The weighted average rate of overnight transactions in the collateralised market repo segment
  • C. The weighted average implicit yield at the weekly auction of 91-day Treasury Bills
  • D. The weighted average lending rate of scheduled commercial banks on fresh rupee loans

Q10. As per the rates prevailing after the Reserve Bank of India's monetary policy statement of August 2026, how wide was the Liquidity Adjustment Facility corridor, that is, the gap between its ceiling and its floor?

  • A. 25 basis points
  • B. 50 basis points
  • C. 75 basis points
  • D. 100 basis points

Q11. Consider the following statements regarding the Reserve Bank of India's liquidity absorption operations in September 2026: 1. On 4 September the Reserve Bank absorbed over ₹6 lakh crore of surplus liquidity through two variable rate reverse repo auctions conducted on the same day. 2. On 15 September the Reserve Bank absorbed ₹3,93,352 crore through a variable rate reverse repo auction, accepting all bids at a cut-off and weighted average rate of 5.24 per cent. 3. On 17 September the Reserve Bank drained ₹50,000 crore of durable liquidity through an outright sale of government securities in the open market. 4. A 30-day variable rate reverse repo auction notified for about ₹7 lakh crore in early September drew bids far in excess of the notified amount, compelling the Reserve Bank to settle at a sharply higher cut-off. Which of the above is/are correctly identified?

  1. On 4 September the Reserve Bank absorbed over ₹6 lakh crore of surplus liquidity through two variable rate reverse repo auctions conducted on the same day.
  2. On 15 September the Reserve Bank absorbed ₹3,93,352 crore through a variable rate reverse repo auction, accepting all bids at a cut-off and weighted average rate of 5.24 per cent.
  3. On 17 September the Reserve Bank drained ₹50,000 crore of durable liquidity through an outright sale of government securities in the open market.
  4. A 30-day variable rate reverse repo auction notified for about ₹7 lakh crore in early September drew bids far in excess of the notified amount, compelling the Reserve Bank to settle at a sharply higher cut-off.
  • A. 1 and 2 only
  • B. 2, 3 and 4
  • C. 1, 2 and 3
  • D. 1 and 4

Q12. Under India's flexible inflation targeting framework, which one of the following correctly describes the authority that determines the inflation target and the body that decides the policy repo rate?

  • A. The target is determined by the Central Government in consultation with the Reserve Bank once in five years, while the policy repo rate is decided by a six-member Monetary Policy Committee.
  • B. The target is determined by the Reserve Bank in consultation with the Central Government every year, while the policy repo rate is decided solely by the Governor of the Reserve Bank of India.
  • C. The target is determined by the Central Board of the Reserve Bank once in five years, while the policy repo rate is decided by the Financial Stability and Development Council.
  • D. The target is notified by the Ministry of Finance once in three years, while all members of the Monetary Policy Committee deciding the repo rate are appointed exclusively by the Central Government.