liquidity management: RBI restores LAF corridor, introduces SDF as floor at 3.75% as part of liquidity management

The collateral-free facility of SDF strengthens the operating framework of the monetary policy.

The market participants had more or less prepared for a move like this as the RBI had been conducting VRRR auctions to suck out excess liquidity at rates which firmed up closer to the policy repo rate.

By introducing SDF, the RBI has restored the Liquidity Adjustment Facility or LAF corridor with SDF at the base at 3.75 per cent and MSF at 4.25 per cent.

While announcing the measures, the RBI Governor Shaktikanta Das said that the interest rate at which 80% of liquidity has been absorbed under the LAF in the fourth quarter of 2021-22 is close to the policy repo rate due to VRRR auctions.

“The central bank had already begun normalising its policy last fiscal by absorbing excess liquidity through variable rate operations. During Friday’s policy review, it took a concrete step by restoring the policy rate corridor under liquidity adjustment facility (LAF) to pre-pandemic width of 50 basis points by introducing standing deposit facility (SDF) at 3.75 as the floor of this corridor. This was imminent given the sharp rise in inflationary pressures,” Dharmakirti Joshi, Chief Economist, CRISIL, said.

The SDF facility will be a tool to absorb excess liquidity from the system and will be applicable to overnight deposits at this stage. The SDF will have the ability to absorb longer term liquidity as and when needed.

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.

He further added that access to SDF and MSF will be at the discretion of the banks. Both the SDF and the MSF will be available at all days of the week including public holidays and weekends from 17:30 to 23:59 pm.

The Fixed Reverse Repo Rate has been kept at 3.35 per cent and along with SDF will impart flexibility to RBI’s liquidity management, the governor said.

The RBI has conducted VRRR auctions to absorb excess liquidity from the system from time to time.

The RBI kept repo rate unchanged at 4 per cent in its first monetary policy review of current financial year and has retained the stance as accommodative.

It has sharply revised upwards the inflation projection for FY2022-23 to 5.7 per cent and pared economic growth projection to 7.2 per cent.