RBI Monetary Policy: Central Bank Activates Standing Deposit Facility To Deal With Surplus Liquidity
The Reserve Bank of India has introduced the standing deposit facility, through which it intends to suck out excess liquidity in the system at lower rates, without offering collateral to banks.
The decision to operationalise the facility, which has been under discussion since 2014, comes at a time banks are parking a record amount of funds at the RBI’s reverse repo window.
As per details announced by the central bank:
The standing deposit facility will be activated at a rate at 25 basis points below the repo rate of 4%. This will now act as the floor of the interest rate corridor.
The marginal standing facility will continue to be offered at 25 basis points above the repo rate.
As such, the width of the interest rate corridor stands restored at 50 basis points.
The fixed rate reverse repo remains at 3.35% and will remain part of the RBI's toolkit, the central bank said. A bulk of the liquidity withdrawal will continue to happen through variable rate reverse repo operations.
The standing deposit facility was suggested in 2014 by a committee headed by Urjit Patel, who was then RBI deputy governor.
The suggestion came after the experience of the 2005-08 period when large capital flows led to a surge in liquidity. After a while the RBI ran short on collateral to offer to banks that parked the surplus funds with the central bank. The committee recommended that a standing deposit facility be introduced, “with the discretion to set the interest rate without reference to the policy target rate”.
The introduction of such a facility needed amendments to the RBI Act. These amendments were cleared in 2018. However, the standing deposit facility was not immediately operationalised.
The 2019 liquidity framework report once again recommended the same. “It has often been felt that for effective liquidity management operations, institutionalising an uncollateralised standing deposit facility is essential. In order to strengthen the operating framework further, the government has since amended the RBI Act, 1934 for introduction of a SDF. The group recommends that the SDF be operationalised early,” the committee said.