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Tags Current Affairs

Standing Deposit Facility

Date: 11 April 2022 Tags: Monetary Policy & RBI

Issue

The Reserve Bank of India has introduced the Standing Deposit Facility (SDF) for absorbing liquidity.

 

Background

The SDF has been announced for an interest rate of 3.75 per cent. It will be used as a tool to reduce liquidity.

 

Details

  • The main purpose for introducing SDF is to absorb additional liquidity of Rs 8.5 lakh crore and tackle inflation.

  • The RBI has been empowered to introduce SDF under the amended Section 17 of the RBI Act, 2018.

  • It operates without collateral and strengthens the operating framework of monetary policy. Apart from liquidity management, it is also a financial stability tool.

  • Along with MSF (marginal standing facility), the SDF will be available on all days of the week. It will replace the fixed rate reverse repo (FRRR). 

 

Operation

  • The SDF rate will be 25 bps below the Repo rate, and it will be applicable to overnight deposits at this stage. 

  • It will restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy.

 

Liquidity in the system

  • Liquidity injected through RBI measures as well as by the government has left high liquidity overhang, which needs to be reduced.

  • RBI will slowly withdraw the liquidity through a multi-year process in a calibrated manner to control the retail inflation.

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