UPSC Prelims Practice Questions — RBI absorbs ₹2.9 lakh cr. to suck excess liquidity

Q1. With reference to the Variable Rate Reverse Repo (VRRR) auctions conducted by the Reserve Bank of India, consider the following statements: 1. It is an absorption operation carried out under the Liquidity Adjustment Facility. 2. The rate at which funds are absorbed is discovered through competitive bidding rather than being announced in advance as a fixed rate. 3. Funds parked by banks under a VRRR auction are accepted on an uncollateralised basis, with no securities offered by the Reserve Bank in exchange. 4. VRRR auctions are conducted only for a fixed tenor of fourteen days, longer tenors being available solely through Open Market Operations. Which of the above is/are NOT correct?

  1. It is an absorption operation carried out under the Liquidity Adjustment Facility.
  2. The rate at which funds are absorbed is discovered through competitive bidding rather than being announced in advance as a fixed rate.
  3. Funds parked by banks under a VRRR auction are accepted on an uncollateralised basis, with no securities offered by the Reserve Bank in exchange.
  4. VRRR auctions are conducted only for a fixed tenor of fourteen days, longer tenors being available solely through Open Market Operations.
  • A. 1 and 2
  • B. 2 and 3
  • C. 3 and 4
  • D. 4 only

Q2. The announcement and conduct of variable rate reverse repo auctions, including the notified amount and tenor for each auction, is the responsibility of which one of the following wings of the Reserve Bank of India?

  • A. Financial Markets Operations Department, which reviews current and evolving liquidity conditions
  • B. Financial Markets Regulation Department, which frames rules for money and debt markets
  • C. Internal Debt Management Department, which manages the Government's market borrowing programme
  • D. Department of Regulation, which issues prudential norms for banks and other lenders

Q3. The Standing Deposit Facility, which displaced the fixed-rate reverse repo as the floor of the Liquidity Adjustment Facility corridor, was operationalised by the Reserve Bank of India with effect from:

  • A. February 2020, along with the revised liquidity management framework
  • B. June 2016, following the amendment of the Reserve Bank of India Act, 1934
  • C. April 2022, following an announcement in the monetary policy statement
  • D. October 2023, along with the incremental cash reserve ratio measures

Q4. Consider the following instruments available to the Reserve Bank of India: 1. Marginal Standing Facility 2. Standing Deposit Facility 3. Variable Rate Repo auction 4. An increase in the Cash Reserve Ratio Which of the above is/are correctly identified as instruments through which the Reserve Bank absorbs liquidity from the banking system?

  1. Marginal Standing Facility
  2. Standing Deposit Facility
  3. Variable Rate Repo auction
  4. An increase in the Cash Reserve Ratio
  • A. 2 and 4
  • B. 1 and 3
  • C. 1, 2 and 4
  • D. 3 and 4

Q5. Taking the two consecutive trading days of September 15 and September 16, 2026 together, approximately how much liquidity did the Reserve Bank of India absorb from the banking system through variable rate reverse repo auctions?

  • A. About ₹5.42 lakh crore
  • B. About ₹6.02 lakh crore
  • C. About ₹6.83 lakh crore
  • D. About ₹9.85 lakh crore, i.e. the entire system-wide surplus

Q6. The September 2026 variable rate reverse repo auctions were conducted in accordance with the operational guidelines set out in the Reserve Bank's revised Liquidity Management Framework, which was announced in:

  • A. 2014, on the recommendations of an expert committee on the monetary policy framework
  • B. 2020, replacing the earlier framework for liquidity management operations
  • C. 2016, when the flexible inflation targeting framework was given statutory backing
  • D. 2022, when the uncollateralised overnight absorption window was operationalised

Q7. Which one of the following best describes the kind of account whose large-scale mobilisation in 2026 was identified as the principal source of the banking system's liquidity surplus?

  • A. A rupee-denominated deposit of a non-resident, the principal of which is not repatriable, maintained with an authorised dealer bank
  • B. A term deposit of a non-resident Indian denominated in a permitted foreign currency, the exchange risk being borne by the accepting bank
  • C. A rupee-denominated and freely repatriable deposit of a non-resident Indian, the exchange risk on which is borne by the depositor
  • D. A foreign currency account opened by an Indian out of foreign exchange brought back on permanent return to India from abroad

Q8. Consider the following categories of foreign exchange inflow: 1. Foreign Currency Non-Resident (Bank) deposits 2. External Commercial Borrowings 3. Overseas Foreign Currency Borrowings 4. Foreign portfolio investment into government securities Which of the above is/are correctly identified as inflows covered by the special USD-INR swap facility opened by the Reserve Bank of India in 2026?

  1. Foreign Currency Non-Resident (Bank) deposits
  2. External Commercial Borrowings
  3. Overseas Foreign Currency Borrowings
  4. Foreign portfolio investment into government securities
  • A. 1, 2 and 3
  • B. 1 and 2 only
  • C. 2, 3 and 4
  • D. 1 and 4

Q9. Which one of the following statements correctly describes an Open Market Operation sale conducted by the Reserve Bank of India?

  • A. A transaction in which the Reserve Bank sells securities to banks with an agreement to repurchase them, permanently removing liquidity from the system
  • B. A sale of foreign currency by the Reserve Bank in the spot market, which necessarily extinguishes the entire rupee surplus of the banking system
  • C. A sale of freshly issued government securities by the Reserve Bank as debt manager, which invariably lowers the fiscal deficit of the Union Government
  • D. An outright sale of government securities out of the Reserve Bank's own portfolio, which withdraws liquidity on a durable basis

Q10. The Reserve Bank's ₹1 lakh crore programme of Open Market Operation sales of government securities announced in September 2026 was to be executed in three tranches. The largest single tranche was:

  • A. ₹25,000 crore, scheduled as the first of the three tranches
  • B. ₹30,000 crore, scheduled as the last of the three tranches
  • C. ₹40,302 crore, scheduled as the middle tranche
  • D. ₹50,000 crore, scheduled as the first of the three tranches

Q11. Consider the following statements comparing the Reserve Bank's liquidity absorption operations in early September 2026 with those in mid-September 2026: 1. The estimated liquidity surplus in the banking system was higher at the beginning of September 2026 than it was in the middle of the month. 2. The amount absorbed through variable rate reverse repo auctions on September 4, 2026 was larger than the amount absorbed on September 16, 2026. 3. The auctions of September 4, 2026 were of overnight tenor, whereas those of September 16, 2026 were of three-day tenor. Which of the statements given above is/are correct?

  1. The estimated liquidity surplus in the banking system was higher at the beginning of September 2026 than it was in the middle of the month.
  2. The amount absorbed through variable rate reverse repo auctions on September 4, 2026 was larger than the amount absorbed on September 16, 2026.
  3. The auctions of September 4, 2026 were of overnight tenor, whereas those of September 16, 2026 were of three-day tenor.
  • A. 1 only
  • B. 1 and 2 only
  • C. 2 and 3 only
  • D. 1, 2 and 3

Q12. Consider the following statements regarding the policy rate corridor within which the Reserve Bank's liquidity operations are anchored: 1. The marginal standing facility rate is placed 25 basis points above the policy repo rate and forms the ceiling of the corridor, while the standing deposit facility rate is placed 25 basis points below it and forms the floor. 2. At its meeting in August 2026 the Monetary Policy Committee raised the policy repo rate to 5.50 per cent while leaving the Bank Rate unchanged at 5.25 per cent. 3. Unlike the marginal standing facility, under which banks borrow by dipping into their statutory liquidity ratio holdings, the standing deposit facility requires no security to be furnished by the Reserve Bank. Which of the statements given above is/are correct?

  1. The marginal standing facility rate is placed 25 basis points above the policy repo rate and forms the ceiling of the corridor, while the standing deposit facility rate is placed 25 basis points below it and forms the floor.
  2. At its meeting in August 2026 the Monetary Policy Committee raised the policy repo rate to 5.50 per cent while leaving the Bank Rate unchanged at 5.25 per cent.
  3. Unlike the marginal standing facility, under which banks borrow by dipping into their statutory liquidity ratio holdings, the standing deposit facility requires no security to be furnished by the Reserve Bank.
  • A. 1 only
  • B. 1 and 2 only
  • C. 1 and 3 only
  • D. 1, 2 and 3