Beyond inflation and growth, the markets were buzzing with the term 'SDF' as the Reserve Bank of India began it's process of post pandemic normalisation but did not tinker with policy rates.
In a bid to manage liquidity in the market the central bank introduced Standing Deposit Facility or SDF at 3.75 per cent. This is the rate at which banks can park their excessive funds with the RBI and other side is MSF (@ 4.25%)where they can borrow an additional amount of overnight money from the central bank.
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At both ends of liquidity corridor, the standing facility at the base will absorb liquidity while the one at the other end will inject liquidity, governor Shaktikanta Das said.
Generally, RBI uses reverse repo to absorb liquidity. In reverse repo, RBI takes liquidity from the banks and gives reverse repo rate of interest to the banks and keeps government securities (GSec, SDL, Tbills) as collateral. The SDF replaces the need for collateral and makes it a more smooth and efficient process.
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The impact of an SDF floor being fixed at 3.75% indicates further hikes in fixed deposit and savings rate as effectively the savings rate for banks is also now higher by 40 bps vs the previous benchmark of the reverse repo.