Monetary policy review: Reversal of SDF, MSF on weekends from Dec 30

Market analysts said that the RBI's persistent focus on addressing the uneven distribution of liquidity in the banking system led them to the adoption of measure

The Reserve Bank of India (RBI) on Friday authorised the reversal of liquidity facilities, including both the Standby Deposit Facility (SDF) and Marginal Standing Facility (MSF), even during weekends and holidays.

This directive, which would enhance the efficiency of liquidity management for banks during weekends, is effective from December 30. 

“We have noticed simultaneous high utilisation of both MSF and SDF by the banks. It is expected that this measure will facilitate better fund management by banks,” RBI Governor Shaktikant Das said in his monetary policy statement.

Das said the measure, if needed, would be reviewed after six months or earlier.

With customers having access to round-the-clock fund transfer services, banks encounter challenges in managing liquidity during weekends when interbank markets are closed, said market analysts. To exercise caution, banks often resort to borrowing funds for a three-day period in the interbank market and the MSF window over the weekend. Similarly, banks with excess liquidity tend to lock their funds for three days using the SDF during weekends.

Market analysts said the RBI’s persistent focus on addressing the uneven distribution of liquidity in the banking system led them to the adoption of the measure.

“The RBI’s consistent concern on skewness of liquidity distribution in the banking system has led them to allow reversal of liquidity facility under both SDF and MSF even on weekends and holidays,” said Madhavi Arora, lead economist, Emkay Global Financial Services.

Market participants said the measure addressed a longstanding demand from banks, and was expected to enhance the management of cash reserve ratio (CRR) and call rates could start moving towards repo rate in coming months.

“Structural changes like this could help aid more symmetric liquidity balances in the system. The overnight rate could start moving towards the repo rate from being close to the MSF over the coming months,” said Abheek Barua, chief economist and executive vice president at HDFC Bank.

However, a segment of the market believes it might not lead to substantial decline in call money rates given the banking liquidity remains tight.

“We expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to also moderate. However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially. This will also lead to a marginal savings in interest costs for banks who end up borrowing and depositing in MSF and SDF respectively over the weekend,” said Karthik Srinivasan, senior vice-president, group head - financial sector ratings, ICRA Ltd.