RBI RBI restores LAF, introduces SDF
Mumbai: The RBI introduced as introduced the Standing Deposit Facility or SDF at 3.75 percent as part of its liquidity management and normalisation of the Liquidity Adjustment Facility (LAF).
Of late, RBI has been resorting to methods such as variable rate reverse repo (VRRR) auctions to suck out excess liquidity from the system, therefore the move was expected by the market participants.
RBI Governor Shaktikanta Das said the interest rate at which 80 percent of liquidity has been absorbed under the LAF in the fourth quarter of 2021-22 is close to the policy repo rate due to VRRR auctions.
The SDF facility will be a tool to absorb excess liquidity from the system and will be applicable to overnight deposits at this stage
At both ends of liquidity corridor, the standing facility at the base will absorb liquidity while the one at the other end will inject liquidity,
Accordingly, 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 SDF rate will be 25 bps below the policy rate, and it will be applicable to overnight deposits at this stage.
It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing. The MSF rate will continue to be 25 bps above the policy repo rate.
Thus, the width of the LAF corridor is restored to the pre-pandemic configuration of 50 bps, symmetrically around the policy repo rate, which will be at the centre of the corridor.
The fixed-rate reverse repo (FRRR) rate is retained at 3.35 percent. It will remain as part of the RBI’s toolkit and its operation will be at the discretion of the RBI for purposes specified from time to time. The FRRR along with the SDF will impart flexibility to the RBI’s liquidity management framework.
Both MSF and SDF will be available on all days of the week, throughout the year.
It has also been decided to restore the opening time for financial markets regulated by the RBI to the pre-pandemic timing of 9:00 am with effect from April 18, 2022, without any change in their closing time prevailing at present.
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