The Reserve Bank of India (RBI) on April 8 introduced the Standing Deposit Facility (SDF) under its monetary policy.
- SDF is an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.
- The main purpose of SDF is to reduce the excess liquidity in the system, and control inflation.
- In 2018, the amended Section 17 of the RBI Act empowered the RBI to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
- By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
- The SDF is also a financial stability tool in addition to its role in liquidity management.
- The SDF will replace the fixed rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
- The reverse repo window is a collateralised one, hence when banks park their money at that window, the RBI gives them securities in return to hold. But given a large amount of surplus liquidity, the RBI was running out of securities to offer.
- Both the standing facilities — the MSF (marginal standing facility) and the SDF will be available on all days of the week, throughout the year.
- The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
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