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Standing Deposit Facility (SDF)

Context:

While retaining the reverse repo rate at 3.35 per cent, the Reserve Bank of India (RBI)  introduced the Standing Deposit Facility (SDF), an additional tool for absorbing liquidity, at an interest rate of 3.75 per cent.

Relevance:

GS III- Indian Economy

Dimensions of the Article:

  1. Key takeaways from the MPC meeting
  2. About Standing Deposit Facility (SDF)
  3. How it will operate
  4. About Monetary Policy Committee (MPC)

Key takeaways from the MPC meeting.

  • The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI)  left unchanged the key policy rate — Repo rate — at 4 per cent and the Reverse repo rate at 3.35 per cent.
  • However, the RBI introduced the Standing Deposit Facility (SDF) – an additional tool for absorbing liquidity – at an interest rate of 3.75 per cent.
  • The central bank retained its accommodative policy stance but hinted that it will be less accommodative in the wake of elevated inflation levels.
  • The policy panel slashed the GDP growth to 7.2 per cent and hiked the inflation forecast at 5.7 per cent for the fiscal 2022-23.

About Standing Deposit Facility (SDF):

  • The main purpose of SDF is to reduce the excess liquidity of Rs 8.5 lakh crore in the system, and control inflation.
  • In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce the SDF – an additional tool for absorbing liquidity without any collateral.
  • By removing the binding collateral constraint on the RBI, the SDF strengthens the operating framework of monetary policy.
  • The SDF is also a financial stability tool in addition to its role in liquidity management.
  • The SDF will replace the fixed rate reverse repo (FRRR) as the floor of the liquidity adjustment facility corridor.
  • Both the standing facilities — the MSF (marginal standing facility) and the SDF will be available on all days of the week, throughout the year.

How it will operate

  • The SDF rate will be 25 bps below the policy rate (Repo rate), and it will be applicable to overnight deposits at this stage.
  •  It would, however, retain the flexibility to absorb liquidity of longer tenors as and when the need arises, with appropriate pricing.
  • The RBI’s plan is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy.

About Monetary Policy Committee (MPC)

  • The Monetary Policy Committee (MPC) is the body of the RBI, headed by the Governor, responsible for taking the important monetary policy decisions about setting the repo rate.
  • Repo rate is ‘the policy instrument’ in monetary policy that helps to realize the set inflation target by the RBI (at present 4%).
Membership of the MPC
  • The Monetary Policy Committee (MPC) is formed under the RBI with six members.
  • Three of the members are from the RBI while the other three members are appointed by the government.
  • Members from the RBI are the Governor who is the chairman of the MPC, a Deputy Governor and one officer of the RBI.
  • The government members are appointed by the Centre on the recommendations of a search-cum-selection committee which is to be headed by the Cabinet Secretary.

Objectives of the MPC

Monetary Policy was implemented with an initiative to provide reasonable price stability, high employment, and a faster economic growth rate.

The major four objectives of the Monetary Policy are mentioned below:
  • To stabilize the business cycle.
  • To provide reasonable price stability.
  • To provide faster economic growth.
  • Exchange Rate Stability.

-Source: Indian Express

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