RBI launches Standing Deposit Facility at 3.75%

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The Reserve Bank of India (RBI) on Friday surprised the market by introducing a standing deposit facility (SDF) at 3.75% which would serve as the floor for the policy corridor. With this, the width of the policy corridor was narrowed to 50 basis points (bps) from 65 bps. Experts pointed out the SDF will allow the absorption of liquidity from the system without requiring banks to provide any collateral in exchange.

The introduction of SDF, nearly eight years after the Patel committee propagated an independent, transparent, non-collateralized concurrent offering, is a smart policy decision, Soumya Kanti Ghosh, chief economist State Bank of India, observed. “Interestingly, since the SDF comes with the conditionality of no collateral of G-secs to be given by the RBI to banks, it will free up securities from SLR holdings of banks. This will thus result in lowering of excess SLR holdings and will lead to an increase in demand for bonds,” Ghosh observed.

With the marginal standing facility (MSF) at the upper end of the policy corridor at 4.25%, the SDF will make up the duo of standing facilities – one to absorb and the other to inject liquidity. Unlike other liquidity instruments which are administered at the discretion of the RBI, the use of the SDF and the MSF will be left to the discretion of banks, and will be available after market hours on all days of the week.

While signalling a move away from accommodation, the RBI did extend an olive branch to the markets by raising the ceiling for government securities that can be held to maturity (HTM) to 23% from 22% up to March 31, 2023. The restoration of the 19.5% cap on HTM securities will be made in a phased manner starting from Q1FY24. When a larger share of securities is moved into the HTM basket, the supply of paper in the market is reduced to that extent, thus supporting bond prices.

RBI deputy governor Michael Patra said the decision to introduce the SDF was taken from a position of strength at an opportune moment, as the central bank is currently absorbing liquidity resulting from government expenditure. “Going forward, it prepares us for both sides of the situation – one, as you are seeing right now, we are absorbing huge amounts of liquidity. Suppose the situation changes and the war ceases and India becomes a preferred habitat for capital flows, as it was in the year before, this enormously increases the capacity with the RBI to sterilise these flows,” Patra said.Bankers welcomed the institution of the SDF. Sushanta Kumar Mohanty, general manager – treasury, Bank of Baroda, said, “SDF was a long-pending demand and dependence on reverse repo will reduce.”

Economists saw the introduction of the SDF as a move to carry out normalisation by stealth. Rahul Bajoria, MD & chief India economist, Barclays, said the introduction of the SDF effectively rolls back the accommodation the RBI provided through the policy corridor and liquidity provisions through the pandemic. “We think this also implies that the RBI is now moving towards a new period of policy management, where the emphasis on supporting growth is reducing, and managing financial conditions is more proactively rising,” Bajoria said.

The RBI said the liquidity withdrawal will be done in a multi-year timeframe with a careful watch on the economic cost of withdrawal and its implications for the stance of monetary policy. Governor Shaktikanta Das said that 80% of the total liquidity absorbed under the liquidity adjustment facility during Q4FY22 has firmed up close to the policy repo rate due to the increased use of variable reverse repo rate (VRRR) auctions.