RBI to operationalize Standing Deposit facility (SDF)
Recently, the Reserve Bank of India (RBI) has announced the introduction of the Standing Deposit Facility (SDF) under the new monetary policy. SDF will be a fundamental measure to reduce surplus liquidity (deposits) from the banking system.
- Earlier, liquidity measures were announced during the COVID pandemic. The RBI had infused liquidity into the economy through several other means. Due to these reasons, a situation of surplus liquidity has arisen in the Indian economy.
- When the liquidity is in surplus (as it is now), the RBI infuses the liquidity through the reverse repo measure.
- However, the reverse repo method is the collateralised option. Therefore, when a bank keeps its money with RBI, it receives securities from RBI in return. Although there is a large amount of surplus liquidity in the economy right now, the RBI does not have that many securities to give to the banks.
- Therefore, the government has introduced SDF as a non-bailable measure. Hence, RBI can now infuse surplus liquidity without giving away securities.
- The SDF measure was brought in through an amendment to the RBI Act in the year 2018. It is based on the recommendations of the Urjit Patel Committee. This measure allows the RBI to get liquidity from commercial banks without collateral.
- The SDF rate will be the new floor rate for the Liquidity Adjustment Facility (LAF) corridor. This fixed rate will replace reverse repo.
- LAF is a monetary policy measure. It allows banks to borrow money through repurchase agreements or repos. All the participants participating in the LAF will be eligible to participate in the SDF scheme.
Key terminology
- Repo Rate: It is the interest rate that RBI receives from the borrowing commercial banks.
- Reverse Repo: Rate is the interest rate that RBI pays to commercial banks when these banks deposit their excess cash with RBI. RBI borrows a part of this money at a fixed rate and some at a variable rate.
Source – The Hindu
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