Standing Deposit Facility

February 11, 2025

The Standing Deposit Facility (SDF) is monetary tool introduced by the Reserve Bank of India (RBI) to manage liquidity in the banking system. It was established on April 8, 2022, to absorb excess funds from commercial banks without the need for collateral. This move came in response to a massive liquidity surplus following extraordinary measures during the pandemic.

What Is the Standing Deposit Facility?

The SDF allows banks to deposit excess funds with the RBI and earn interest without receiving government securities in return.
This mechanism is collateral-free.
The SDF serves as a floor for the Liquidity Adjustment Facility (LAF) corridor, replacing the reverse repo rate.

Concerns Over Banking Behaviour

Recently, RBI Governor Sanjay Malhotra expressed concern that banks prefer parking funds in the SDF rather than lending them in the uncollateralised call money market. This behaviour is problematic as it leads to a higher overnight call money rate compared to the repo rate. The RBI encourages banks to actively participate in the call money market to enhance its vibrancy.

Impact on the Call Money Market

If banks redirect funds from the SDF to the call money market, it would lower the overnight interbank lending rates. This shift is essential for improving liquidity in the banking system and ensuring that funds are actively circulating rather than being parked.

Operation of the SDF

The SDF operates at a rate that is 25 basis points below the policy repo rate. Banks can place deposits overnight at this fixed rate. The RBI retains the flexibility to absorb liquidity for longer tenors under the SDF, depending on market needs.

Future of Reverse Repo Rate

While the SDF has taken precedence, the Fixed Rate Reverse Repo (FRRR) remains a tool in the RBI’s toolkit. The RBI will decide its operation based on specific needs. The combination of SDF and FRRR provides the RBI with enhanced flexibility in managing liquidity.

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