Skip to main content

What is Standing Deposit Facility (SDF)?

Reserve Bank of India (RBI) has added another tool to its monetary policy kit with the introduction of Standing Deposit Facility (SDF).

What is Standing Deposit Facility (SDF)?

Standing Deposit Facility (SDF) is an arrangement wherein banks can park their surplus liquidity with Reserve Bank of India (RBI), without the need for any collateral in exchange.

SDF rate is the interest rate offered by RBI on the funds parked by banks under SDF.

What is the basis of introduction of SDF?

In 2014, Expert Committee set up by RBI to revise and strengthen monetary policy framework (Chairman: Dr. Urjit Patel) had recommended the introduction of SDF. 

To empower RBI to introduce SDF, Section 17(1A) was added to Reserve Bank of India Act, 1934 in 2018, which reads as – “Accept deposit, repayable with interest, from banks or any other person under the Standing Deposit Facility Scheme, as approved by the Central Board, for the purposes of liquidity management”.

From when is SDF operational?

SDF is operational with effect from April 08, 2022.

How is SDF different from Reverse repo?

  • Under Reserve repo, banks can park their surplus liquidity with RBI against a collateral of approved government securities. On the other hand, SDF is an uncollateralised facility.
  • Access to SDF and Marginal Standing Facility (MSF) is at the discretion of banks, unlike repo / reverse repo are available at the discretion of RBI. 

What is the impact of SDF on monetary policy framework?

  • SDF has replaced the Fixed Rate Reverse Repo (FRRR) as the floor of the Liquidity Adjustment Facility (LAF) corridor (also known as policy corridor or interest rate corridor).
  • The introduction of SDF provides symmetry to the operating framework of monetary policy. At both ends of the LAF corridor, there are standing facilities – one to absorb (SDF) and the other to inject liquidity (MSF). 
  • By removing the binding collateral constraint on the central bank, the SDF strengthens the operating framework of monetary policy.
  • SDF is also a financial stability tool in addition to its role in liquidity management.

What is Liquidity Adjustment Facility (LAF) corridor?

LAF corridor is a range of interest rates consisting of MSF rate as the ceiling rate, Repo rate at the center and SDF rate as the floor rate of the corridor. Presently, LAF corridor is of 50 basis points (i.e. 0.50%), with repo rate being 25 basis points below MSF rate and 25 basis points above SDF rate. At current rates, the interest rate corridor appears as below –

MSF rate (6.15%) ---------------------------------------------------------

Repo rate (5.90%) --------------------------------------------------------

SDF rate (5.65%) ---------------------------------------------------------

How are SDF deposits treated for CRR, SLR and LCR requirements?

  • Deposits under SDF are not reckoned as balances eligible for maintenance of Cash Reserve Ratio (CRR) under Section 42 of Reserve Bank of India Act, 1934.
  • But SDF deposits are an eligible asset for maintenance of Statutory Liquidity Ratio (SLR) under Section 24 of Banking Regulation Act, 1949.
  • The overnight balances held by banks with RBI under SDF are eligible as ‘Level 1 High Quality Liquid Assets (HQLA)’ for computation of Liquidity Coverage Ratio (LCR).

How are SDF transactions processed?

  • The overnight SDF would be operated under Straight Through Processing (STP) mode. Under STP mode, the bids would be settled automatically and immediately on receipt by e-Kuber system with concurrent debit of funds to ensure efficient and faster processing. 
  • Participants have the option to use SDF-ASISO (Automated Sweep-In and Sweep-Out facility) wherein depending upon a pre-set limit, the SDF bids are triggered automatically without any manual intervention at the end of the day. 
  • The minimum bid size under SDF is Rs.1 crore and in multiples thereof. There is no ceiling on the bid amount.


References

Reserve Bank of India. (2014, January 10). 'Report of the Expert Committee to Revise and Strengthen the Monetary Policy Framework'. Retrieved from https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/ECOMRF210114_F.pdf

Reserve Bank of India. (2022, April 08). 'Governor’s Statement: April 8, 2022'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53535

Reserve Bank of India. (2022, April 08). 'RBI to operationalise Standing Deposit facility (SDF)'. Retrieved from https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53539

Reserve Bank of India. (2022, August 29). 'The Reserve Bank of India Act, 1934'. Retrieved from https://rbi.org.in/Scripts/OccasionalPublications.aspx?head=Reserve%20Bank%20of%20India%20Act

Reserve Bank of India. (2022, November 23). 'Basel III Framework on Liquidity Standards – Standing Deposit Facility'. Retrieved from https://m.rbi.org.in/Scripts/NotificationUser.aspx?Id=12413&Mode=0


Follow at - Telegram   Instagram   LinkedIn   Twitter

Labels:

Comments

Post a Comment

Popular Posts

Payment of Agency Commission to Agency Banks (ABs) and Disbursement of Government Pension by ABs

Reserve Bank of India (RBI) has issued guidelines on the conduct of Government business by Agency Banks (ABs), payment of agency commission to ABs and disbursement of Government pension by ABs. Who are ABs? ABs mean all Public Sector Banks (PSBs), scheduled Private Sector Banks (PVBs), scheduled Payments Banks (PBs), and scheduled Small Finance Banks (SFBs) appointed by the RBI under Section 45 of the RBI Act, 1934, by mutual agreement, to carry out Government banking business of the Central Government (CG) / State Governments (SGs). What is agency commission? Agency commission means the remuneration paid by the RBI to an AB in consideration of it acting as an agent of the RBI in the conduct of general banking business of the CG and the SGs at the places and in the manner specified in the agreement between the RBI and the bank, with the exception of the functions relating to the management of the public debt. What are the guidelines on appointment of ABs? Any eligible bank which intend...
Post a Comment
Read more

Deposits between a person resident in India and a person resident outside India

Reserve Bank of India (RBI) has updated the regulations on deposits between a person resident in India and a person resident outside India. What are the restrictions on deposits between a person resident in India and a person resident outside India? No person resident in India shall accept any deposit from, or make any deposit with, a person resident outside India. However, the following deposits are exempted – Deposits held in rupee accounts maintained by foreign diplomatic missions and diplomatic personnel and their family members in India with an authorised dealer. Deposits held by diplomatic missions and diplomatic personnel in special rupee accounts namely Diplomatic Bond Stores Account to facilitate purchases of bonded stocks from firms and companies who have been granted special facilities by customs authorities for import of stores into bond. The funds in the account may be repatriated outside India without the approval of the RBI. Deposits held in accounts maintained in foreig...
Post a Comment
Read more

Credit Derivatives

Reserve Bank of India (RBI) has issued directions on credit derivatives. What is Credit Derivative? Credit derivative means a derivative contract whose value is derived from the credit risk of an underlying debt instrument or an index of underlying debt instruments. What is Credit Default Swap (CDS) and Total Return Swap (TRS)? Credit Default Swap (CDS) means a credit derivative contract in which one counterparty (protection seller) commits to pay to the other counterparty (protection buyer) in the case of a credit event with respect to a reference entity and in return, the protection buyer makes periodic payments (premium) to the protection seller until the maturity of the contract or the credit event, whichever is earlier. Total Return Swap (TRS) means a credit derivative contract under which one counterparty (total return payer) commits to transfer the entire economic performance of a reference asset to the other counterparty (total return receiver), and, in return, receives a pre-d...
Post a Comment
Read more

Credit Cards and Debit Cards

Reserve Bank of India (RBI) has issued directions on issuance of credit cards and debit cards. To whom are the directions applicable? The directions are applicable to the following Regulated Entities (REs) – Commercial Banks  Small Finance Banks (SFBs) Regional Rural Banks (RRBs) Primary (Urban) Co-operative Banks (UCBs) Non-Banking Financial Companies (NBFCs) for all layers – NBFC-Investment and Credit Companies (NBFC-ICC) NBFC-Factor  NBFC-Micro Finance Institutions (NBFC-MFI)  Housing Finance Company (HFC)  What is a credit card? Credit Card is a physical / virtual payment instrument issued with a pre-approved revolving credit limit that can be used to purchase goods and services or draw cash advances. What is a debit card? Debit Card is a physical / virtual payment instrument linked to a Savings Bank / Current Account which can be used to withdraw cash, make online payments, do Point of Sale (PoS) terminal / Quick Response (QR) code transactions, fund transfer, e...
Post a Comment
Read more

Lead Bank Scheme (LBS)

Reserve Bank of India (RBI) has issued guidelines on the Lead Bank Scheme (LBS). Who is a Lead Bank? RBI designates a commercial bank as Lead Bank in each district, to coordinate the efforts of the banks, Government, National Bank for Agriculture and Rural Development (NABARD) and other stakeholders at the district level to improve credit flow to the priority sectors and promote financial inclusion in the district. 12 public sector banks and 2 private sector banks (Jammu & Kashmir Bank and ICICI Bank) have been assigned lead bank responsibilities, covering 778 districts across the country. What appointments are made under the LBS? Every lead bank shall appoint a Lead District Manager (LDM) in each district where it has the lead bank responsibility, to exclusively oversee and coordinate the implementation of the LBS in the district. NABARD shall appoint a District Development Manager (DDM) for each district to act as a liaison between NABARD and the district-level banking and financ...
Post a Comment
Read more