Standing Deposit Facility by RBI

Context

• A Standing deposit facility at 3.75% has been launched by RBI which would serve as the floor for the policy corridor. This decision of RBI narrowed the width of the policy corridor to 50 basis points from 65bps.
• It is predicted by the expert that it will absorb the liquidity from the market without requiring banks to provide any collateral in exchange.

Standing deposit facility

• SDF is a tool used by RBI to absorb the liquidity from the market without using any collateral to control the inflation in an economy.

• This concept of SDF was first recommended in the urjit committee report to bring financial stability to the market.
• RBI had introduced the SDF in 2018 with an amendment to section 17 of the RBI Act.
• SDP strengthens the operating framework of monetary policy through this removal of collateral constraints which empowered the bank to park their excess amount with RBI.
• SDF also acts as a strong alternative to fixed reverse repo rate as the floor of the liquidity adjustment facility corridor.
• It will be 25bps below the repo rate and will be applicable to overnight deposits at this stage.