STANDING
DEPOSIT FACILITY - ECONOMY
News:
Explained: What is SDF,
the RBI’s new tool to absorb excess liquidity to control inflation?
What's
in the news?
●
The main purpose of SDF is to reduce the
excess liquidity of Rs 8.5 lakh crore in the system and control inflation.
Standing
Deposit Facility (SDF):
●
The standing deposit facility is a collateral-free liquidity absorption
mechanism implemented by the RBI with the intention of transferring
liquidity out of the commercial banking sector and into the RBI.
●
It enables the RBI to take liquidity
(deposits) from commercial banks without having to compensate them with
government securities.
Backdrop
of SDF:
●
In 2018, the amended Section 17 of the RBI Act, 1934 empowered the Reserve Bank to
introduce the SDF – an additional tool for absorbing liquidity without any
collateral.
Need
for SDF:
●
It is 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.
Committee:
●
The SDF was suggested in 2014 by a
committee headed by Urjit Patel.
Features:
●
The SDF would replace the Fixed Rate Reverse Repo (FRRR) as the floor of the
Liquidity Adjustment Facility (LAF) corridor.
●
At present, SDF rate will be 25 basis points (bps) below the policy repo
rate.
●
Eligible participants can place deposits
with the RBI on an overnight basis at the fixed rate.
○
However, the RBI retains the flexibility
to absorb liquidity for longer tenors under the SDF with appropriate pricing,
as and when the need arises.
Significance:
●
SDF provides flexibility for managing
excess liquidity since it frees the RBI from the requirement to disclose
government securities on the balance sheet.
●
It is designed to enable the Reserve Bank
to deal with extraordinary situations in which it has to absorb massive amounts
of liquidity.
Difference
between SDF and Reverse Repo Rate:
The central bank employs
reverse repo rate and SDF to remove excess liquidity from the system.