Standing Deposit Facility

To provide financial stimulus to the economy during the Covid pandemic, India’s central bank injected ample liquidity into the system. However, with the economy improving, and inflation becoming a bigger threat, over the past few months, the Reserve Bank of India (RBI) has been using various tools to absorb liquidity from the banking system in India and strike a balance between growth and inflation. The most used method is to attract banks with lower reverse repo rates (the interest that RBI pays to banks for the funds that the banks deposit with it) so that they deposit funds with the central bank. However, in April, RBI decided to keep the reverse repo rate unchanged at 3.35 per cent. Instead, it used the provision for standing deposit facility (SDF) to absorb liquidity from the system. What Is SDF? SDF is a tool through which the central bank can absorb liquidity without...