SDF to Absorb Excess Liquidity

SDF to Absorb Excess Liquidity

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The Standing Deposit Facility, or SDF, is a new RBI liquidity tool. It is a monetary instrument that provides banks with collateral-free access to RBI liquidity. Because it is a significant factor in determining policy rates, the RBI has developed this instrument to absorb excess liquidity in the market. You must be aware that the rates on your deposits and loans are affected by this change in policy rates. As a result, you must pay close attention to the SDF rate, the repo rate, and other rates. The most important aspects of the SDF are as follows:

• It is a monetary policy instrument to absorb liquidity without collateral

• It has become the LAF corridor floor, swapping the tool of the fixed-rate reverse repo

• It is operated on an overnight basis (after market hours)

• It has enough flexibility to absorb liquidity for a longer tenor at a pre-determined rate

Deposits under the SDF will not be considered as balances eligible for the maintenance of the Cash Reserve Rat Let's find out what has increased liquidity before we can figure out how it will absorb it. A few of the possible reasons that may have contributed to an increase in liquidity are listed below.

• An increase in advance tax receipts

• An increase in small savings receipts and public provident funds

• A temporary postponement of capital expenditures

• An increase in foreign portfolio investment in equity and debt

• Net capital inflows in the form of deposits from non-resident Indians and trade credit

SDF gives the RBI more leeway to manage surplus liquidity because it removes the binding obligation for the RBI to display government securities on the balance sheet. How? There will be two entries on the balance sheet for each SDF: one under net claims on banks on the liabilities side (currency-in-circulation). RBI has more opportunities to absorb excess liquidity as a result of this nullified impact on its balance sheet.