Informist, Friday, Apr 8, 2022
MUMBAI – Four years after the amendment to the Reserve Bank of India Act, the central bank has decided to institute the standing deposit facility to effectively replace the fixed rate reverse repo as the floor of the liquidity adjustment facility corridor.
Work on the standing deposit facility had begun after demonetisation in 2016 amid a flush of liquidity in the banking system. Necessary legal changes meant it was only in early 2018 that the RBI Act was amended to allow for such a facility.
In September 2019, the RBI's Internal Working Group to review the liquidity management framework recommended that the standing deposit facility be "operationalised early".
The RBI today set the standing deposit facility rate at 3.75%, which is 25 basis points below the policy repo rate, and this will be applicable to overnight deposits at this stage with immediate effect.
"With the introduction of the standing deposit facility at 3.75%, the policy repo rate being at 4.00% and the MSF (marginal standing facility) rate at 4.25%, the width of the LAF corridor is restored to its pre-pandemic configuration of 50 basis points," the RBI statement said.
Thus, the liquidity adjustment facility corridor will be symmetric around the policy repo rate with the marginal standing facility rate as the ceiling and the standing deposit facility rate as the floor with immediate effect.
The standing deposit facility would allow the RBI to suck out excess liquidity without providing collateral in exchange.
Till now, the RBI was using fixed and variable rate reverse repos to absorb liquidity. In reverse repos, RBI pulls out liquidity from the banking system and pays reverse repo rate of interest and gives government securities as collateral. But, when a huge amount of liquidity needs to be absorbed, it's difficult in many ways for the RBI to offer so much collateral in return.
Both the standing facilities--the marginal standing facility and the standing deposit facility will be available on all days of the week, throughout the year, between 1730 IST and 2359 IST.
RBI Governor Shaktikanta Das said that like the marginal standing facility rate, the standing deposit facility rate will also move in tandem with the policy repo rate. If the monetary policy committee hikes the repo rate then MSF, SDF will move also move higher in a similar quantum.
With this, the liquidity adjustment facility corridor will be symmetric around the policy repo rate with the MSF rate as the ceiling and the SDF rate as the floor with immediate effect.
In early 2020 during the pandemic, the width of the liquidity adjustment facility corridor was widened to 90 basis points by asymmetric adjustments in the reverse repo rate vis-a-vis the policy repo rate.
Das also clarified that there is no proposal to allow non-banking financial institutions to access the standing deposit facility right now. Currently, only scheduled commercial banks area allowed to use various liquidity windows available under the RBI liquidity adjustment facility.
With the introduction of the standing deposit facility, the fixed rate reverse repo facility has no use as liquidity management tools, RBI Deputy Governor Michael Patra said today during a media interaction after the monetary policy committee meeting.
The RBI said that the standing deposit facility is also a financial stability tool in addition to its role in liquidity management, it will strengthen operating framework of monetary policy.
"The FRRR (fixed rate reverse repo rate) along with the SDF (standing deposit facility) will impart flexibility to the RBI's liquidity management framework," the RBI statement said.
Patra also highlighted that the standing deposit facility will enormously enhance the RBI's ability to sterilise forex flows and in surplus liquidity, the standing deposit facility and variable rate reverse repo are operative tools.
Whenever the central bank purchases dollar in the forex market to absorb huge foreign inflows, it leads to a rise in rupee liquidity in the banking system, but now with the standing deposit facility in its armour, the RBI can efficiently manage surplus liquidity. End
Reported by Richard Fargose
Edited by Shirsha Thakur
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