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Difficulty: MediumMonetary Policy Framework, RBI Mechanisms, Banking System, and Financial Markets

Consider the following statements regarding the Standing Deposit Facility (SDF) introduced by the Reserve Bank of India (RBI):

1. The SDF allows commercial banks to park surplus liquidity with the RBI without requiring government securities as collateral.
2. The SDF replaced the fixed rate reverse repo as the lower floor of the Liquidity Adjustment Facility (LAF) corridor.
3. The interest rate for the SDF is set 25 basis points above the policy Repo Rate.

Which of the statements given above are correct?

  1. A
    1 only
  2. 1 and 2 onlyAnswer
  3. C
    2 and 3 only
  4. D
    1, 2, and 3

Answer

Statements 1 and 2 only are correct.
Statements 1 and 2 are correct. The Standing Deposit Facility (SDF) allows the RBI to absorb surplus liquidity from commercial banks without transferring collateral (government securities). Introduced in April 2022, it replaced the fixed reverse repo rate as the floor of the Liquidity Adjustment Facility (LAF) corridor. Statement 3 is incorrect because the SDF rate is positioned 25 basis points below the Repo Rate, whereas the Marginal Standing Facility (MSF) rate is 25 basis points above the Repo Rate.

Step-by-Step Solution

1
Analyze Statement 1 regarding SDF collateral requirement.
Statement 1 is correct. The Standing Deposit Facility (SDF) is an uncollateralized liquidity absorption mechanism, allowing the RBI to absorb liquidity without providing government securities.
Unlike Reverse Repo operations, SDF does not lock up RBI's government securities portfolio.
2
Analyze Statement 2 regarding the LAF corridor floor.
Statement 2 is correct. In April 2022, the RBI instituted the SDF at the floor of the Liquidity Adjustment Facility (LAF) corridor, taking over the role of the fixed rate reverse repo.
The LAF corridor is bounded by the SDF at the bottom and the Marginal Standing Facility (MSF) at the top.
3
Analyze Statement 3 regarding the pricing of the SDF rate relative to the Repo Rate.
Statement 3 is incorrect. The SDF rate is pegged 25 basis points below the Repo Rate (Repo−0.25%Repo - 0.25\%), whereas the Marginal Standing Facility (MSF) rate is set 25 basis points above the Repo Rate (Repo+0.25%Repo + 0.25\%).
Setting the floor below the policy rate ensures orderly money market operations and interest rate corridor alignment.

Key Concept

Standing Deposit Facility (SDF) and LAF Corridor Mechanics
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Topics

Monetary Policy Framework, RBI Mechanisms, Banking System, and Financial Markets