Mumbai: The Reserve Bank of India final week launched the standing deposit facility (SDF) as a device to regulate inflation within the nation by liquidity absorption. It restored the pre-pandemic liquidity hall of fifty foundation factors by fixing SDF at 3.75 per cent as the ground for the liquidity adjustment facility (LAF) and marginal standing facility at 4.25 per cent. So, why did the central financial institution introduce SDF when the reverse repo charge will also be used to soak up liquidity?
What Is Reverse Repo Rate?
The reverse repo charge, a liquidity absorption device, is the rate of interest at which the RBI borrows cash from industrial banks. In its first bi-monthly financial coverage evaluate for 2022-23, the central financial institution has determined to maintain it unchanged at 3.35 per cent. The central financial institution absorbs liquidity by elevating it.
What Is SDF?
The standing deposit facility permits the RBI to soak up extra money from the economic system by sucking liquidity from industrial banks with out giving authorities securities in return to the lenders. The RBI has mounted the SDF charge at 3.75 per cent.
Under the SDF, the banks can place deposits with the RBI on an in a single day foundation. The RBI, nonetheless, retains the pliability to soak up liquidity for longer tenors below the SDF with applicable pricing, as and when the necessity arises. All liquidity adjustment facility (LAF) contributors can be eligible to take part within the SDF scheme, in line with the RBI’s web site.
SDF vs Reverse Repo
Both SDF and reverse repo charge are utilized by the central financial institution to soak up liquidity within the system. The distinction is that by reverse repo operations, the RBI must deposit collateral or authorities securities to borrow from industrial banks; whereas SDF doesn’t require any such collateral.
Crisil Chief Economist D Okay Joshi mentioned, “Using SDF, the RBI can now take in liquidity from the system with out depositing any collateral, and this instrument is extra handy and efficient.”
Rating company ICRA in its observe mentioned the RBI has determined to introduce the SDF as a way of liquidity absorption, which in contrast to the mounted charge reverse repo (FRRR) used for in a single day liquidity absorption could be utilised with out requiring eligible securities as collateral.
HDFC Chief Economist Abheek Barua mentioned the standing deposit facility is only a reverse repo charge with out collateral, broadly. “But, reverse repo charge doesn’t qualify to be adjusted as SLR by the industrial lenders, whereas deposits below the SDF can be utilized by the banks as SLR.”
On requested why the RBI most well-liked SDF over elevating reverse repo, an economist, requesting anonymity, mentioned, “Sometimes the RBI doesn’t have sufficient bonds to suck enormous liquidity like what occurred within the case of demonetisation, and typically, the federal government is apprehensive about depositing collateral in extra quantity.”
When Was SDF Introduced?
The concept of an SDF was first mooted within the Urjit Patel Monetary Policy Committee report in 2014, which later acquired the federal government’s nod following an modification to the RBI Act in 2018, vide the Finance Bill.
The vital legislative amendments to introduce SDF was made in 2018 by the Finance Bill and the RBI has avoided utilising the ability for a number of years now. The concept of an SDF was first mooted within the Urjit Patel Monetary Policy Committee report in 2014.
Repo Rate and MSF
Repo charge is the rate of interest at which the RBI lends cash to the industrial banks and presently stands at 4 per cent, whereas the marginal standing facility (MSF) is a window for banks to borrow from the central financial institution in an emergency state of affairs when inter-bank liquidity dries up utterly and stands at 4.25 per cent.
Inflation Rate Currently
The RBI absorbs liquidity from the system to regulate inflation. The central is remitted to maintain inflation throughout the vary of 2-6 per cent. While the CPI-based inflation charge in February stood at 6.07 per cent, the speed in January was 6.01 per cent.
