In continuation of its approach towards liquidity management and normalisation of the Liquidity Adjustment Facility (LAF) corridor, the Reserve Bank of India (RBI) on Friday introduced the Standing Deposit Facility or SDF at 3.75 percent.
The RBI has reinstated the LAF corridor by establishing SDF at 3.75 percent and Marginal Standing Facility (MSF) at 4.25 percent.
With this, the liquidity corridor has been normalised to a symmetrical 50 basis points. SDF is 25 basis points below the repo rate of 4 percent and the Marginal Standing Facility/MSF is at 25 basis points above the repo rate.
What is a Standing Deposit Facility (SDF)?
A Standing Deposit Facility or SDF allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks.
When the central bank has to absorb a tremendous amount of money from the banking system through the reverse repo window, it becomes difficult for it to provide such a volume of government securities in return. This happened during the time of demonetisation.
The SDF, thus, is a collateral-free arrangement meaning that RBI need not give collateral for liquidity absorption. The SDF will allow the RBI to suck out liquidity without offering government securities as collateral.
The liquidity corridor has now been normalised to a symmetrical 50 basis points (SDF is 25 basis points below the repo rate of 4 percent, and MSF is 25 basis points above the repo rate).
During the Covid-19 pandemic, the liquidity corridor was expanded to an asymmetrical 90 basis points, with the reverse repo being 65 basis points below the repo rate. The MSF was 25 basis points above the repo rate.
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