Reserve Bank of India’s Standing Deposit Facility

The Reserve Bank of India (RBI) has reported increase in the utilisation of the Standing Deposit Facility (SDF) by banks. This trend indicates a heightened demand for precautionary funds. The RBI’s report titled Three Years of the Standing Deposit Facility – Some marks the growing reliance on the SDF since its introduction in April 2022.

Overview of the Standing Deposit Facility

The SDF allows banks to deposit funds with the RBI without collateral. It was established to enhance the liquidity management framework of the RBI. The SDF serves as a floor for the liquidity adjustment facility (LAF), replacing the fixed-rate reverse repo. This shift aligns with global best practices in banking liquidity management.

Recent Trends in Bank Liquidity Management

Recently, banks placed an average of ₹2.13 trillion under the SDF. This is a notable increase from ₹1.12 trillion in February 2025. The report indicates a coexistence of deficit liquidity and increased SDF placements from mid-December 2024 to March 2025. This suggests an asymmetric distribution of liquidity in the banking sector.

Impact of Payment Systems on Liquidity

The transition to 24-hour payment systems has created uncertainty for banks. High-value transactions occurring late in the day can lead to shortfalls in reserve maintenance. Consequently, banks prefer to maintain larger balances in the SDF to mitigate these risks.

Changes in Fund Placement Preferences

Banks have shown a decreased inclination to utilise the variable rate reverse repo (VRRR) for parking surplus funds. In the second half of FY25, banks’ average recourse to the marginal standing facility (MSF) dropped to ₹6,000 crore from ₹8,000 crore in the first half. The average absorption under the LAF was ₹1.26 trillion, with 82.6% attributed to SDF placements.

Interest Rate Structure and LAF Corridor

The SDF rate is set 25 basis points below the policy repo rate, while the MSF rate is 25 basis points above. This structure restores the LAF corridor width to its pre-pandemic level of 50 basis points. The SDF and MSF provide symmetric access for banks, allowing them to manage liquidity more effectively.

Flexibility and Discretion in Liquidity Absorption

Access to the SDF and MSF is at the discretion of banks. This contrasts with other liquidity measures like repurchase transactions and cash reserve ratios, which are managed by the RBI. The RBI also retains the flexibility to absorb liquidity for longer tenors under the SDF.

Questions for UPSC:

1. Examine the role of the Reserve Bank of India in managing liquidity through the Standing Deposit Facility.
2. Discuss in the light of recent trends how the SDF impacts the banking sector’s liquidity management strategies.
3. Critically discuss the implications of 24-hour payment systems on banks’ liquidity positions.
4. With suitable examples, analyse the relationship between the SDF rate and the overall monetary policy framework of the Reserve Bank of India.

Answer Hints:

1. Examine the role of the Reserve Bank of India in managing liquidity through the Standing Deposit Facility.

1. The SDF allows banks to deposit funds without collateral, enhancing liquidity management.
2. It serves as a floor for the liquidity adjustment facility (LAF), replacing the fixed-rate reverse repo.
3. SDF facilitates better liquidity absorption by banks, reflecting precautionary demand for funds.
4. Access to SDF is at banks’ discretion, providing flexibility compared to other RBI-managed liquidity tools.
5. It aligns with global best practices in banking, promoting a more stable financial environment.

2. Discuss in the light of recent trends how the SDF impacts the banking sector’s liquidity management strategies.

1. Recent increase in SDF placements indicates banks are prioritizing liquidity over other investment options.
2. The average funds placed under SDF rose , reflecting greater precautionary measures by banks.
3. Coexistence of deficit liquidity with high SDF placements suggests a shift in banks’ liquidity strategies.
4. Decreased usage of variable rate reverse repo (VRRR) indicates a preference for SDF for surplus funds.
5. Overall, SDF enhances banks’ ability to manage liquidity risks in a volatile financial landscape.

3. Critically discuss the implications of 24-hour payment systems on banks’ liquidity positions.

1. 24-hour payment systems increase transaction volume, creating liquidity uncertainty for banks.
2. High-value transactions late in the day can lead to shortfalls in reserve maintenance.
3. Banks are compelled to hold larger balances under SDF to mitigate risks associated with liquidity shortages.
4. This shift may lead to a reassessment of banks’ liquidity management frameworks.
5. Consequently, banks may need to adapt strategies to ensure compliance with reserve requirements.

4. With suitable examples, analyse the relationship between the SDF rate and the overall monetary policy framework of the Reserve Bank of India.

1. The SDF rate is set 25 basis points below the policy repo rate, influencing borrowing costs for banks.
2. This structure helps maintain a symmetric LAF corridor, allowing effective liquidity management.
3. For example, a lower SDF rate encourages banks to deposit excess funds, stabilizing liquidity in the system.
4. The MSF rate, set above the repo rate, provides a counterbalance, ensuring liquidity injection when needed.
5. Overall, the SDF rate plays a critical role in shaping monetary policy and influencing economic conditions.