RBI introduces Standing Deposit Facility replacing reverse repo rate
April 2022
The introduction of SDF marked a significant evolution in India's liquidity management framework. This facility allows banks to deposit funds with the RBI without providing collateral, creating a cleaner interest rate corridor. The move addressed the challenge of managing structural surplus liquidity that emerged during the COVID-19 pandemic. SDF operates at 25 basis points below the repo rate, providing a clear floor for the policy corridor. This innovation demonstrates the RBI's adaptive approach to liquidity management, moving from a system dependent on collateralized reverse repo operations to an uncollateralized deposit facility.
UPSC Angle: UPSC may test understanding of why SDF was introduced, its operational differences from reverse repo, and its impact on monetary policy transmission effectiveness