RBI To Operationalise Standing Deposit Facility (SDF).

Why in news?

• Under the new monetary policy, RBI announced the introduction of SDF as a basic tool to absorb surplus liquidity (deposit) from banking system.
• Earlier, liquidity measures undertaken in the wake of pandemic, combined with liquidity injected through various other operations of RBI, have left excess liquidity in the system.
• When liquidity is surplus, as it is now, the RBI absorbs liquidity through the reverse repo facility.
• However, reverse repo window is a collateralised one. So when banks park their money at that window, the RBI gives them securities in return to hold. But given a large amount of surplus liquidity, the RBI was running out of securities to offer.
• Therefore, government has introduced SDF as a non-collateralised window. So the RBI can absorb liquidity without offering securities now.
• SDF has its origins in a 2018 amendment to RBI Act (based on Urjit Patel Committee recommendations ) and allows RBI to absorb liquidity from commercial banks without giving any collateral in return.
• SDF rate will be the new floor rate for the liquidity adjustment facility (LAF) corridor, replacing fixed-rate reverse repo.
• LAF is a monetary policy tool that allows banks to borrow money through repurchase agreements or repos.
• All LAF participants will be eligible to participate in SDF scheme.

Definitions

• Repo rate is the interest rate that the RBI charges when commercial banks borrow money from it.
• Reverse repo rate is the interest rate that the RBI pays commercial banks when they park their excess cash with the central bank. RBI borrows a part of this money at a fixed rate and some of it at variable rate.