What is Standing Deposit Facility? RBI’s new tool to pump out excess liquidity EXPLAINED

In its initial bi-monthly financial policy meeting for FY 2023, the banking concern of Asian country proclaimed a brand new tool to soak up excess liquidity from the system – Standing Deposit Facility (SDF). Through this new tool the financial institution will absorb excess liquidity from the industrial banks, that is presently hovering at regarding Rs eight.5 large integer large integer, while not associate degree exchange of collateral like government-backed securities (G-Secs).

Interest rates: SDF vs reverse repo

Interest rate for SDF has been mounted at three.75 per cent, forty basis points beyond reverse repo rate. it's a win-win for each the financial institution and industrial banks, because it are additional enticing for the industrial banks to pump that liquidity back to the financial institution thanks to higher returns, whereas for the financial institution it'd not have to be compelled to supply any security to the bank.

“The SDF rate are twenty five bits per second below the policy rate, and it'll be applicable to long deposits at this stage. It would, however, retain the pliability to soak up liquidity of longer tenors as and once the requirement arises, with applicable valuation,” the run Governor Shaktikanta Das same within the policy statement Fri.

How will the banks avail this facility?

The SDF is presently accessible as associate degree long facility wherever banks will interact in transactions through the long SDF facility which is able to be accessible to them between 17:30 hrs to 23:59 hrs on all days, as well as Sundays and holidays. it'd be reversed on the subsequent operating day in metropolis. Banks will use the central bank’s electronic portal, ie, the e-Kuber system to use the ability. The theme is effective as of Gregorian calendar month eight, 2022, the run same.

When was SDF initial introduced?

The idea regarding SDF was ab initio introduced nearly eight years agone by a financial policy committee semiconductor diode by Urijit Patel, WHO was then the deputy governor of the financial institution. The Urijit Patel committee came up with the concept of a collateral free facility once the experiences of the 2005-2008 amount, once there was a surge in liquidity, that left the central banks in need of collateral. The committee urged SDF as a non-collateralized coincident providing. In 2018, the banking concern of Asian country Act was authorized  to introduce the new tool once the govt. allowed it to amend the run Act within the Finance Bill of 2018. The modification came as a results of demonetization once banks were plush with excess money.

How can SDF facilitate run in managing liquidity going ahead?

ICICI Direct same RBI’s introduction of DDF effectively marks the speed hike of lower finish of the LAF (liquidity adjustment facility) passageway at three.75% . “While run has not raised the reverse repo rate, it's introduced a standing deposit facility (SDF) at three.75% (25 bits per second below repo rate) because the floor of the LAF passageway. Indirectly, the reverse repo rate hike is at forty bits per second as long rates can currently be pegged at three.75% except for VRRR (variable reverse repo rate) that's variable in nature and presently hovers around repo rate levels,” the brokerage same.

SBI analysis same since the SDF comes with the state of no collateral of G-secs to incline by the run to banks, it'll liberate securities from SLR holdings of banks. this can so end in lowering of excess SLR holdings and can result in a rise in demand for bonds. Barclays Asian country same it expects policy rate hikes of fifty basis points that may push the repo rate to four.5 per cent, with the new SDF floor rising to four.25 per cent by end-2022.