Mumbai, April 8 (FN Agency) In a bid to normalise liquidity in the system, the Reserve Bank of India (RBI) has decided to introduce the standard deposit facility (SDF) for absorbing liquidity from the banking system at 3.75 per cent. Similarly, the apex bank has also narrowed the liquidity adjustment facility (LAF) corridor to 0.50 per cent, the position that prevailed before the pandemic. The SDF had been introduced in 2018 through an amendment to Section 17 of the RBI Act, as an additional tool for absorbing liquidity without collaterals. “The RBI has decided to introduce the SDF as the floor of the LAF corridor, which would provide symmetry to the operating framework of monetary policy,” Das said while unveiling the first bi-monthly monetary policy of the current fiscal. Explaining further he said that this move will ensure a standing absorption facility at the bottom of the LAF corridor, similar to the standing injection tool at the upper end of the corridor, namely the marginal standing facility (MSF).
Accordingly, the liquidity corridor has been normalised to a symmetrical 50 basis points, with SDF being kept at 25 basis points below the repo rate of 4 per cent at 3.75 per cent and the MSF at 25 basis points above the repo rate at 4.25 per cent. “Thus, at both ends of the LAF corridor, there will be standing facilities – one to absorb and the other to inject liquidity,” Das said, adding that the SDF will not only ensure liquidity management, but it is also a financial stability tool. According to Das, the access to SDF and MSF will be at the discretion of banks, unlike repo/reverse repo, OMO and CRR which are available at the discretion of the Reserve Bank. The fixed rate reverse repo (FRRR) rate, which is retained at 3.35 per cent, will, however, remain as part of RBI’s toolkit and its operation will be at the discretion of the apex bank for purposes specified from time to time.
“The FRRR along with the SDF will impart flexibility to the RBI’s liquidity management framework,” he added. During the pandemic, Das said, the RBI offered liquidity facilities to the tune of Rs 17.2 lakh crore out of which Rs 11.9 lakh crore was utilised. So far Rs 5 lakh crore has been returned or withdrawn on the lapse of various facilities on their due dates. Das noted that the extraordinary liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI have left a liquidity overhang of the order of Rs 8.5 lakh crore in the system. He further said the RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner beginning this year and that the objective is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy. “RBI will continue to adopt a nuanced and nimble footed approach to liquidity management while maintaining adequate liquidity in the system,” Das added.