11th February 2025 (12 Topics)
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Standing Deposit Facility (SDF)
Context
The Reserve Bank of India (RBI), in its recent monetary policy announcement, expressed concern over banks preferring to park their excess funds in the Standing Deposit Facility (SDF) rather than lending them in the uncollateralized call money market.
What is the Standing Deposit Facility (SDF)?
- The SDF is a tool introduced by the RBI in April 2022 to manage liquidity in the banking system.
- It absorbs excess liquidity (deposits) from commercial banks without requiring the banks to provide government securities as collateral.
- Purpose: The SDF serves as a floor for the Liquidity Adjustment Facility (LAF) corridor, replacing the reverse repo rate mechanism.
- How it works: Banks can park their excess funds with the RBI in exchange for interest, but without needing to provide any collateral in return.
- The SDF was introduced when there was a liquidity surplus in the market, meaning there was more money in the banking system than needed.
- Unlike the reverse repo, which requires the RBI to provide government securities to banks, the SDF does not involve any collateral, making it a simpler tool for liquidity absorption.
- RBI’s Concerns
- Liquidity Deficit: Despite a liquidity deficit, banks are parking funds in the SDF, which prevents the flow of funds in the call money market.
- Impact on Rates: The overnight call money rate is 5-10 basis points higher than the repo rate, as funds aren’t circulating in the interbank market.
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