Standing Deposit Facility at higher interest rate introduced for Banks

Our Bureau | | Updated on: Apr 08, 2022
The SDF move will have a satiating impact on G-Sec yields over the medium term

The SDF move will have a satiating impact on G-Sec yields over the medium term | Photo Credit: DHIRAJ SINGH

The SDF rate of 3.75 per cent will be the new floor rate for the Liquidity Adjustment Facility (LAF) corridor

The Reserve Bank of India (RBI) has introduced a non-collaterlised Standing Deposit Facility (SDF) to absorb surplus liquidity from the banking system at a higher interest rate.

The SDF rate of 3.75 per cent will be the new floor rate for the so-called liquidity adjustment facility (LAF) corridor, replacing the fixed rate reverse repo (interest rate: 3.35 per cent).

Market players say with this move, the effective LAF floor rate has moved up by 40 basis points from 3.35 per cent to 3.75 per cent.

This has resulted in normalisation of the LAF corridor to pre-pandemic level of 50 basis points, with SDF being 25 basis points below the repo rate and the marginal standing facility (MSF) 25 basis points above the repo rate.

Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India (SBI), said the introduction of SDF, nearly eight years after the Patel committee had propagated an independent, transparent, non-collateralised concurrent offering is a smart policy decision.

He emphasised that as lending to the central bank has no credit risk, there was no need to provide Government Securities (G-Secs) in the first place as collateral when a market participant placed its funds with RBI.

“Interestingly, since the SDF comes with the conditionality of no collateral of G-secs to be given by RBI to banks, it will free up securities from Statutory Liquidity Ratio (SLR) holdings of banks.

“This will thus result in lowering of excess SLR holdings and will lead to an increase in demand for bonds,” Ghosh said.

The SDF move will have a satiating impact on G-Sec yields over the medium term, he added.

“Of course, there will still be demand for Reverse repo auctions for banks that are not holding large excess SLR to meet the regulatory dispensation.

“Since Reverse Repo is less remunerative, it might induce such banks to now strive for investment in G-secs. Thus, in both the cases (banks holding large excess SLR and banks not so large with excess SLR) it will be a win-win for markets,”opined Ghosh.

Clearly, SDF will now be an added weapon of maintaining orderly financial conditions as Government borrowing programme will also now be a function of the liquidity corridor, he said.

Over time, SDF (that is currently overnight) and Variable Rate Reverse Repo/VRRR (that is in multiples of fortnightly durations) may have a dynamic meeting ground.

Published on April 08, 2022
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