Context:
Standing Deposit Facility (SDF) marks three years since its introduction as Reserve Bank of India’s liquidity management framework.
Standing Deposit Facility (SDF):
- A liquidity absorption tool introduced by the Reserve Bank of India (RBI) to manage surplus liquidity in the banking system.
- Implemented in 2022, as part of the RBI’s monetary policy framework.
- Objectives –
- Liquidity Management – Helps absorb excess liquidity from the banking system, especially during periods of high liquidity.
- Inflation Control – By reducing surplus liquidity, the SDF aids in controlling inflationary pressures.
Key Features:
- Collateral-Free – Unlike the reverse repo mechanism, the SDF does not require the RBI to provide government securities as collateral for liquidity absorption.
- Part of Liquidity Adjustment Facility (LAF) – The SDF serves as the lower bound of the LAF corridor, replacing the reverse repo rate in this role.
- Interest Rate – The SDF rate is set 25 basis points below the repo rate.
- Voluntary Participation – Banks can voluntarily park their surplus funds with the RBI under the SDF.
Source: RBI
Previous Year Question
If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do?
1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate
Select the correct answer using the code given below:
[UPSC Civil Services Exam – 2020 Prelims]
(a) 1 and 2 only
(b) 2 only
(c) 1 and 3 only
(d) 1, 2 and 3
Answer: (b)
Explanation:
Expansionary monetary policy, or easy monetary policy, is when a central bank uses its tools to stimulate the economy. It increases the money supply, lowers interest rates and increases demand. It boosts economic growth.
Raising SLR makes banks park more money in government securities and reduce the level of cash in the economy. Doing the opposite helps maintain cash flow in the economy. Hence, statement 1 is not correct.
Under expansionary monetary policy, RBI reduces repo rate and bank rate to increase liquidity in the banking sector. Hence, statement 3 is not correct.