The introduction of new financial instrument by Reserve Bank of India can handle issue of liquidity in the economy effectively. Discuss (200 Words)
Refer - Business Line
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IAS Parliament 2 years
KEY POINTS
· The decision of the Monetary Policy Committee (MPC) earlier this month to institute a new instrument called the Standing Deposit Facility (SDF) as the floor in the Liquidity Adjustment Facility (LAF) corridor is a significant milestone.
· SDF as it stands currently has the following features viz; (a) it is the floor of the LAF corridor, replacing the hitherto fixed rate reverse repo;
· It is a monetary policy instrument to absorb liquidity without any collateral (collaterals in this case are normally government securities) with an interest rate of 3.75 per cent;
· It is operated on an overnight basis, with the flexibility to absorb liquidity for longer tenor with appropriate pricing;
· Deposits under the SDF shall not be reckoned as balances eligible for the maintenance of the cash reserve ratio (CRR) under Section 42 of the RBI Act, 1934, but shall be an eligible asset for maintenance of the statutory liquidity ratio (SLR) under Section 24 of the Banking Regulation Act, 1949.
· SDF being a non-collateralised instrument gives the flexibility for surplus liquidity management of larger magnitude as it removes the “binding constraint” on RBI to possess government securities in its balance sheet.
· Thus, SDF becomes a truly monetary policy instrument. The RBI Governor in his press conference of April 8 in this context has mentioned that SDF would enable RBI to sterilise liquidity.
