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What is Standing Deposit Facility (SDF)?

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Standing Deposit Facility (SDF)

Mains level : Major monetary policy decisions by RBI

The Reserve Bank of India (RBI) introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.

What is SDF?

  • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank 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.
  • Both the standing facilities — the MSF (marginal standing facility) and the SDF will be available on all days of the week, throughout the year.

How it will operate?

  • The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh crore in the system, and control inflation.
  • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
  • It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.
  • The RBI’s plan is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy.

Also read:

What is Reverse Repo Normalization?

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