What’s in the news?
- The Reserve Bank has taken steps towards normalisation of liquidity management to pre-pandemic levels, with the introduction of the standing deposit facility (SDF) as the basic tool to absorb excess liquidity, and narrowing the liquidity adjustment facility (LAF) to 0.50% from the 0.90%.
- Governor Shaktikanta Das said the SDF would be at 3.75%, ie, 0.25% below the repo rate and 0.5% lower than the marginal standing facility (MSF) which helps the banks with funds when required.
- The SDF has its origins in a 2018 amendment to the RBI Act and is an additional tool for absorbing liquidity without any collateral.
- By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy. It is also a financial stability tool.