RBI Monetary Policy: Liquidity Withdrawal Will Be Done In Multi-Year Time Frame, Says Governor Das

The central bank has introduced the SDF to absorb excess liquidity. It has also decided to restore the Liquidity Adjustment Facility corridor and Marginal Standing Facility at 4.25 per cent

New Delhi: The Reserve Bank of India (RBI) in its bi-monthly Monetary Policy Committee (MPC) statement, announced by Governor Shaktikanta Das on Friday, said that a 3.75 per cent Standing Deposit Facility (SDF) was implemented as part of its liquidity management strategy.

According to the governor, the RBI would engage in a gradual withdrawal of liquidity over a multi-year timeframe beginning this year, while adding he mentioned that the central bank would engage in gradual, multi-year withdrawal of Rs 8.5 lakh crore excess liquidity in the system.

The central bank has introduced the SDF to absorb excess liquidity. It has also decided to restore the Liquidity Adjustment Facility (LAF) corridor and Marginal Standing Facility (MSF) at 4.25 per cent. Though the RBI has kept all benchmark rates unchanged, it has brought in SDF at 3.75 per cent which is 25bps below Repo Rate of 4 per cent.

“The extraordinary liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI have left a liquidity overhang of the order of Rs 8.5 lakh crore in the system,” the RBI governor said in the news meet.

“Withdrawal of liquidity to be multi-year, can be two years, can be three years. It will depend on the evolving situation. The objective is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy,” Shaktikanta Das said.

He also said the RBI will continue to adopt a nuanced, nimble approach to liquidity management while ensuring adequate liquidity in the system.

“While doing so, I would like to reiterate our commitment to ensure the availability of adequate liquidity to meet the productive requirements of the economy. We also remain focussed on completion of the borrowing programme of the government and towards this end the RBI will deploy various instruments as warranted,” he added.

What is SDF?

Standing Deposit Facility (SDF) allows the RBI to absorb liquidity (deposit) from commercial banks without giving government securities in return to the banks.

When the central bank has to absorb tremendous amount of money from the banking system through the reverse repo window, it becomes difficult for it to provide such volume of government securities in return. This had happened during demonetisation.

The SDF is a collateral free arrangement meaning that RBI need not give collateral for liquidity absorption, which allows the RBI to suck out liquidity without offering government securities as collateral.