RBI to operationalise Standing Deposit facility (SDF)

RBI in its circular dated April 8, 2022, announced that a Standing Deposit Facility (SDF) is being operationalised with immediate effect, i.e., from April 8, 2022. The existing Fixed Rate Reverse Repo (FRRR) henceforth be replaced by SDF as the floor of the LAF corridor.

So far, RBI used three policy rates under the LAF corridor to manage its monetary policy operations, including the repo rate, at which it lends to banks, the reverse repo rate or the rate at which it drains excess liquidity from banks, and the marginal standing facility (MSF) rate at which RBI supplies liquidity when conditions are challenging. In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy. The SDF is also a financial stability tool in addition to its role in liquidity management.

SDF rate will be 25 basis points (bps) below the policy repo rate, i.e., at 3.75 per cent (current Reverse Repo rate). Under the scheme all the eligible participants (banks and primary dealers) can place deposits with the RBI on an overnight basis at the fixed rate” it said.  The Reserve Bank, however, retains the flexibility to absorb liquidity for longer tenors under the SDF with appropriate pricing, as and when the need arises, it said. All other liquidity arrangements under the extant liquidity management framework will continue as hitherto, according to the announcement.

The following are the salient features and operational details of the Standing Deposit Facility (SDF) scheme.

1. The overnight SDF facility will be available between 17:30 hrs to 23:59 hrs on all days, including Sundays and holidays and would be reversed on the following working day in Mumbai.
2. The minimum bid size under SDF is Rupees one crore and in multiples thereof. There is no ceiling on the bid amount.
3. The rate of interest on amount deposited under this facility will be as decided by the RBI from time to time. Effective April 8, 2022, it will be at 25 basis points below the policy repo rate, i.e., at 3.75 per cent.
4. 1 The allotment will be in multiples of Rupees one crore. The settlement of transactions for overnight fixed rate operation will be on a continuous basis (STP). The reversal of overnight SDF transactions would be at the start of day on the following working day in Mumbai.
5.  In case of an unscheduled holiday, the reversals scheduled for that day will take place on the following working day in Mumbai. The RBI will pay interest for the additional day(s).
6. Deposits under the SDF shall not be reckoned as balances eligible for the maintenance of the cash reserve ratio (CRR) under Section 42 of the RBI Act, 1934, but shall be an eligible asset for maintenance of the statutory liquidity ratio (SLR) under Section 24 of the Banking Regulation Act, 1949.

Operation mechanism:

SDF operations will be conducted on the RBI’s e-Kuber system, where banks can submit their bids through electronic mode. The overnight SDF would be operated under the Straight Through Processing (STP) model. Under the STP mode, the bids would be settled automatically and immediately on receipt by the e-Kuber system with the concurrent debit of funds so as to ensure efficient and faster processing. The transactions undertaken by the participant shall be final and any request for cancellation/ modification of the bids shall not be entertained.

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