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.
- In
contrast to SDF, reverse repo
operations require the RBI to deposit collateral in the form of
government assets in order to borrow money from commercial banks.
- Under
the current liquidity system, the Reserve
Bank has discretion over liquidity absorption through reverse repos,
open market operations and the cash reserve ratio. SDF, on the other hand,
will allow banks to store surplus liquidity with the Reserve Bank at their
discretion.