New Delhi: The Reserve Bank of India (RBI) in its bi-monthly Monetary Policy Committee (MPC) statement announced by Governor Shaktikanta Das on Friday said that a 3.75% Standing Deposit Facility (SDF) has been put in place. place as part of its liquidity management strategy. .

According to the governor, the RBI would engage in a phased withdrawal of liquidity over a multi-year period starting this year, while adding that he had mentioned that the central bank would engage in a phased, multi-year withdrawal of Rs 8, 5 lakh crore excess liquidity in the system.

The central bank introduced the SDF to absorb excess liquidity. It also decided to restore the Liquidity Adjustment Facility (LAF) corridor and the Marginal Standing Facility (MSF) to 4.25%. Although the RBI kept all benchmark rates unchanged, it cut the SDF to 3.75%, 25 basis points below the 4% repo rate.

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“The extraordinary liquidity measures taken as a result of the pandemic, combined with the liquidity injected through various other RBI operations have left excess liquidity in the order of Rs 8.5 lakh crore in the system,” said the RBI governor in the news. to meet.

“The cash out needs to be multi-year, maybe two years, maybe three years. It will depend on how the situation develops. The goal is to restore the size of excess liquidity in the system to a level consistent with the current monetary policy stance,” Shaktikanta Das said.

He also said that the RBI will continue to take a nuanced and agile approach to liquidity management while ensuring adequate liquidity in the system.

“In doing so, I would like to reiterate our commitment to ensuring the availability of adequate liquidity to meet the productive needs of the economy. We also remain focused on completing the government’s borrowing program and to this end, the RBI will deploy various instruments as required,” he added.

What is the SDF?

The Standing Deposit Facility (SDF) allows the RBI to absorb cash (deposits) from commercial banks without giving government securities back to the banks.

When the central bank has to absorb a huge amount of money from the banking system through the reverse repo window, it becomes difficult for it to provide such a volume of government securities in return. This had happened during the demonetization.

The SDF is a collateral-free arrangement, which means that the RBI does not need to provide collateral for the absorption of cash, which allows the RBI to suck in cash without offering government securities as collateral. .

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