Standing Deposit Facility (SDF)

April 23, 2025

The Standing Deposit Facility (SDF) has become important tool for the Reserve Bank of India (RBI) in managing liquidity in the banking system. Introduced on April 8, 2022, the SDF allows banks to deposit surplus funds with the RBI without needing to provide collateral in return. This mechanism has evolved to address the challenges faced during periods of high liquidity and has shown increase in usage in recent months.

Purpose and Functionality of the SDF

The SDF serves as a liquidity absorption tool. It was designed to replace the reverse repo rate as the lower bound of the liquidity adjustment facility (LAF) corridor. This change allows banks to park excess funds with the RBI while earning interest. The SDF is particularly beneficial during times of surplus liquidity, where traditional methods may require the RBI to provide government securities as collateral.

Recent Trends in SDF Utilisation

Recently, banks placed an average of ₹2.13 trillion under the SDF, increase from ₹1.12 trillion in February. This rise indicates a growing precautionary demand for funds among banks. The bulletin released by the RBI marks an asymmetric distribution of liquidity, showing that banks are increasingly relying on the SDF amid fluctuating liquidity conditions.

Impact on Banking Operations

The SDF’s introduction has altered how banks manage their liquidity. The coexistence of deficit liquidity and increased SDF placements suggests banks prefer to hold larger balances under the SDF rather than using the variable rate reverse repo (VRRR). This shift reflects banks’ need for immediate liquidity access, especially with the rise of 24-hour payment systems and high-value transactions.

SDF Rate and LAF Corridor

The SDF rate is set at 25 basis points below the policy repo rate, while the marginal standing facility (MSF) rate is 25 basis points above. This arrangement restores the LAF corridor to its pre-pandemic width of 50 basis points. The SDF and MSF provide banks with options to manage liquidity effectively, allowing them to choose between absorbing and injecting liquidity based on their needs.

Flexibility and Discretion in Accessing SDF

Access to the SDF and MSF is at the discretion of banks. This flexibility contrasts with other liquidity management tools, such as cash reserve ratio or open market operations, which are strictly controlled by the RBI. The SDF allows banks to respond dynamically to their liquidity requirements, enhancing their operational efficiency.

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