taking care reverse repo rate At 3.35 per cent, the Reserve Bank of India (RBI) introduced on Friday (April 8). fixed deposit facility (SDF), an additional instrument for absorbing liquidity at an interest rate of 3.75 per cent.
Role of SDF
The main objective of SDF is to reduce and control excess liquidity of Rs 8.5 lakh crore in the system. inflation,
In 2018, the amended Section 17 of the RBI Act empowered the Reserve Bank to introduce SDF – an additional tool for absorbing liquidity without any collateral. By removing the binding collateral constraint on the RBI, the SDF strengthens the operational framework of monetary policy. In addition to its role in liquidity management, SDF is also a financial stability tool.
The SDF will replace Fixed Rate Reverse Repo (FRRR) as the floor of the Liquidity Adjustment Facility corridor. Both the permanent facilities – MSF (Marginal Standing Facility) and SDF will be available throughout the year on all days of the week.
how will it work
The SDF rate will be 25 bps lower than the policy rate (repo rate) and will be applicable on overnight deposits at this level. However, it will retain the flexibility to absorb long-term liquidity as and when required, with reasonable pricing. RBI plans to restore the size of the liquidity surplus in the system to a level in line with the current monetary policy stance.
reverse repo rate
The Fixed Rate Reverse Repo (FRRR) rate which has been retained at 3.35 per cent, shall continue to be part of RBI’s toolkit, and shall operate at the discretion of RBI, for the purposes specified from time to time. The FRRR with SDF will provide flexibility to the liquidity management framework of the RBI, the RBI said.
question of liquidity
Liquidity has been injected through various other actions of the RBI along with “extraordinary” liquidity measures taken in the wake of the pandemic, leaving an order of Rs 8.5 lakh crore liquidity in the system.
This has increased the level of retail inflation in the system. “RBI will engage in a gradual and calibrated withdrawal of this liquidity over a multi-year time frame in a non-disruptive manner earlier this year,” RBI Governor Shaktikanta Das said.
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