Standing Deposit Facility

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In its first bi-monthly monetary policy meeting for FY 2023, the Reserve Bank of India announced a new tool to absorb excess liquidity from the system – Standing Deposit Facility (SDF). 


Standing Deposit Facility 

  • This new tool of RBI can absorb excess liquidity from the commercial banks without an exchange of collateral such as government-backed securities (G-Secs). 
  • Interest rate for SDF has been fixed at 3.75 percent, 40 basis points higher than the reverse repo rate (and below the policy rate). 
  • It will benefit both the central bank and commercial banks, as it will be more attractive for the commercial banks to pump that liquidity back to the central bank due to higher returns, while for the central bank it would not need to offer any security to the commercial bank. 
  • The SDF is currently available as an overnight facility. 

When was SDF first introduced? 

  • The idea about SDF was initially introduced by a monetary policy committee led by Urjit Patel. The committee came up with the idea of a collateral free facility after the experiences of the 2005-2008 period, when there was a surge in liquidity, which left the central banks short of collateral. 
  • It was introduced in 2018 by amending the Section 17 of the RBI Act which empowered the Reserve Bank to introduce the SDF. 

Other benefits 

  • By removing the binding collateral constraint on the RBI, it strengthens the operating framework of monetary policy. 
  • It is also a financial stability tool in addition to its role in liquidity management. 
Q. Consider the following statements with respect to Standing Deposit Facility: 

1. With the help of this tool the RBI can absorb excess liquidity from the commercial banks with an exchange of SLR quota G-Sec. 

2. The idea about SDF was introduced in India by a monetary policy committee led by Urjit Patel. 

3. It is an effective tool for curbing the Inflation. 

Which of the statements given above are correct? 

(a) Only 1 and 2 (b) Only 2 and 3 (c) Only 3 (d) 1, 2 and 3

Ans. (b)

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