High SDF balances signal asymmetric liquidity conditions: RBI Bulletin

RBI report highlights precautionary cash hoarding and uneven fund distribution in banking system

The increased share of the standing deposit facility (SDF) in absorption by the Reserve Bank of India (RBI) shows greater precautionary demand for funds on the part of banks, the central bank has said in  a report titled  “Three Years of the Standing Deposit Facility: Some Insights”, released on Tuesday.

 

The report, authored by RBI staffers, does not represent the views of the central bank.

 

Banks’ placement of funds in March under the facility averaged ₹2.13 trillion, higher than the ₹1.12 trillion in the previous month.

 

The coexistence of deficit liquidity and fund placement under the SDF from mid-December 2024 to end-March 2025 suggests an asymmetric distribution of liquidity in banking, the bulletin highlighted.

 

Since its inception in April 2022, the facility has been an important feature of the central bank’s liquidity-management framework, replacing the fixed-rate reverse repo as the floor of the liquidity adjustment facility (LAF).

 

The SDF is in line with global best practices wherein deposit facilities are in the form of deposits without collateral.

 

Amid the need for higher liquidity in view of 24 hours’ format payment systems, banks are facing uncertainty in their day-to-day transactions because high-value transactions at late hours can result in a shortfall in reserve maintenance, the bulletin said.

 

Moreover, the “just-in-time” release of funds from the Treasury to the end beneficiary has considerably shrunk the amount of float money with banks earlier.

 

Thus, banks increasingly prefer to hold larger balances under the SDF. This has resulted in banks showing a lower inclination in parking surplus funds with the central bank through the variable rate reverse repo (VRRR) operations of longer tenors under the LAF.

 

Banks’ recourse to the MSF at a daily average of ₹6,000 crore in the second half (H2) of FY25 was lower than the ₹8,000 crore in the first half of the financial year.

 

Of the average absorption under the LAF at ₹1.26 trillion during H2, average placement under the SDF constituted about 82.6 per cent, or ₹1.04 trillion, while the remaining amount was absorbed through VRRR auctions.

 

The SDF rate, which is applicable on overnight deposits without collateral, was set at 25 basis points (bps) below the policy repo rate.

 

This, along with the MSF rate at 25 bps above the repo rate, restored the width of the LAF corridor to its pre-pandemic level of 50 bps.

 

Thus, standing facilities were instituted at both ends of the LAF corridor — one to absorb and the other to inject liquidity, rendering the operating framework symmetric.

 

Furthermore, access to the SDF and marginal standing facility are at the discretion of banks, unlike repurchase transactions, outright open market operations and the cash reserve ratio, which are conducted at the discretion of the RBI.

 

In addition, when there is a need, the RBI has the flexibility to absorb liquidity for longer tenors under the SDF with appropriate pricing. 

FINE PRINT

- Banks’ average SDF placements rose to ₹2.13 trillion, up from ₹1.12 trillion month-on-month 

- SDF constituted 82.6% of total absorption under RBI’s Liquidity Adjustment Facility in H2FY25

  - Uncertainty from 24x7 payment systems and just-in-time treasury fund flows drive higher SDF usage