CURRENT AFFAIRS
CURRENT AFFAIRS
Description
The Standing Deposit Facility (SDF), introduced by the Reserve Bank of India (RBI) on April 8, 2022, has emerged as a crucial instrument in regulating surplus liquidity within the banking sector. It allows banks to deposit excess funds with the central bank without needing to provide collateral, offering a streamlined approach to liquidity absorption, especially during times of monetary surplus.
Purpose And Mechanism
The SDF acts as a non-collateralized liquidity absorption facility, effectively replacing the reverse repo rate as the lower boundary of the Liquidity Adjustment Facility (LAF) corridor. Through this facility, banks can earn interest on their idle funds parked with the RBI, eliminating the need for the central bank to issue government securities in return.
This system proves especially beneficial when excess liquidity overwhelms the traditional absorption tools, ensuring smooth and efficient monetary operations.
Increasing Utilisation Trends
In recent months, the use of the SDF has increased notably. Banks deposited an average of ?2.13 trillion through the facility, up from ?1.12 trillion in February, according to the latest RBI bulletin. This rise suggests that banks are taking a more cautious stance on liquidity, particularly in light of evolving cash flow needs and uneven liquidity distribution across the financial system.
Effect On Bank Liquidity Management
The introduction of the SDF has reshaped the way banks approach liquidity. The simultaneous presence of liquidity shortages and elevated SDF balances indicates that banks prefer the immediate access and flexibility offered by the SDF over instruments like the Variable Rate Reverse Repo (VRRR).
This change is especially important in an era of round-the-clock payment systems and increasing volumes of high-value transactions, where liquidity agility is vital.
Rate Structure And LAF Corridor
The SDF rate is pegged 25 basis points below the policy repo rate, while the Marginal Standing Facility (MSF) is set 25 basis points above it, reinstating the pre-pandemic LAF corridor of 50 basis points. These facilities help banks manage liquidity proactively, providing options for both absorption and infusion based on current needs.
Operational Flexibility
Unlike other RBI-controlled tools such as the Cash Reserve Ratio (CRR) or Open Market Operations (OMOs), both the SDF and MSF are accessible at the discretion of individual banks. This autonomy allows financial institutions to respond swiftly to liquidity changes, enhancing their operational flexibility and financial planning.
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