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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


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