Quanti. Tools → SDF (=Reverse Repo walla game Without Collaterals)

Question 1

What is SDF (Standing Deposit Facility)?

Answer 1

A monetary policy tool used by the RBI to absorb excess liquidity (money) from the market.
Banks can deposit their surplus funds with the RBI and earn interest.
Key Difference: Unlike Reverse Repo, the RBI does not provide any collateral (government securities) to the banks.

Question 2

Why is the SDF a useful tool for the RBI?

Answer 2

Inflation Control: Helps remove excess money from circulation, reducing inflationary pressures.
No Collateral Needed: RBI doesn’t have to pledge government securities, offering more flexibility in liquidity management.

Question 3

SDF: Key Timeline

Answer 3

2013: Proposed by the Urjit Patel Committee.
2018: RBI Act amended to formally include SDF.
2022 (April): SDF officially launched by the RBI.

Question 4

SDF vs. Reverse Repo: Is Reverse Repo obsolete?

Answer 4

No. Reverse Repo remains a tool within the RBI’s toolkit.
RBI can use Reverse Repo strategically as needed.
Key Difference: Reverse Repo involves collateral (government securities); SDF does not.

Question 5

Why would a bank choose SDF over Reverse Repo?

Answer 5

Different interest rates and time periods: The choice depends on the banks’ needs and the prevailing rates offered by the RBI.
Cash-flow management: Banks analyze their own cash-flow needs to decide which tool is better.
No compulsion: The RBI doesn’t force banks to use one over the other.

Question 6

What is the Policy Corridor?

Answer 6

The difference (or width) between the Standing Deposit Facility (SDF) rate and the Marginal Standing Facility (MSF) rate.
The SDF acts as the floor of the corridor (the lower limit for interest rates).
The MSF acts as the ceiling of the corridor (the upper limit for interest rates).

Question 7

Why is the Policy Corridor important?

Answer 7

Guides Short-term Interest Rates: The corridor sets the range within which short-term interest rates in the market can fluctuate.
Monetary Policy Transmission: It helps the RBI transmit changes in its policy stance to the broader economy through influencing interest rates.
Liquidity Management: Provides RBI flexibility in managing liquidity (money supply) in the system.

Question 8

How do SDF and Reverse Repo relate to the Policy Corridor?

Answer 8

Setting Boundaries: The SDF and Reverse Repo rates help determine the width of the corridor and influence where market interest rates fall within that range.
Liquidity Absorption (SDF): By setting the SDF rate, the RBI creates a floor for interest rates, discouraging banks from lending below that rate as they can park funds with the RBI.
Liquidity Injection (Reverse Repo): The Reverse Repo rate influences the cost of short-term borrowing for banks.

Question 9

Example: How can the RBI use the policy corridor to fight inflation?

Answer 9

Widening the Corridor: Increase the MSF rate (making borrowing more expensive) and increase the SDF rate (making it more attractive to deposit with the RBI).
Result: This encourages banks to save rather than lend, reducing money supply and helping control inflation.