Effective immediately, the LAF corridor will be symmetric around the policy repo rate with the MSF rate as the cap and the SDF rate as the floor, Das says
Effective immediately, the LAF corridor will be symmetric around the policy repo rate with the MSF rate as the cap and the SDF rate as the floor, Das says
The Reserve Bank on Friday took steps to normalize liquidity management to pre-pandemic levels, with the introduction of the standing deposit facility (SDF) as the basic tool to absorb excess liquidity and the capping of the liquidity adjustment facility (LAF) at 0.50%. from 0.90%.
Governor Shaktikanta Das said the SDF would come in at 3.75%, ie 0.25% below the repo rate and 0.5% below the Marginal Standing Facility (MSF), which helps banks with funds if needed.
The SDF has its origins in a 2018 amendment to the RBI Act and is an additional tool for raising liquidity without collateral.
By removing the mandatory collateral constraint for the RBI, the SDF strengthens the monetary policy framework, he said, adding that it is also a tool of financial stability.
“The SDF will replace the fixed rate reverse repo (FRRR) as the floor of the LAF corridor,” he added.
“The LAF corridor will be symmetric around the policy repo rate with the MSF rate as the cap and the SDF rate as the floor, effective immediately,” said Mr. Das, announcing the first bi-monthly policy review for FY23.
“Therefore there will be permanent facilities at both ends of the LAF corridor – one to absorb and the other to inject liquidity. Accordingly, access to SDF and MSF will be at banks’ discretion as opposed to repo/reverse repo, OMO and CRR available at the Reserve Bank’s discretion,” he said.
The fixed rate reverse repo remains at 3.35% and remains part of the RBI toolkit, which is operated at the central bank’s discretion, he added.
Additionally, Mr Das said that as the situation returned to normal, RBI took action to rebalance liquidity conditions while ensuring its actions were “quick and proactive but well-timed”.
“The Reserve Bank will continue to take a nuanced and light-footed approach to liquidity management while maintaining adequate liquidity in the system,” he assured.
In the past two years, the RBI has offered liquidity facilities in the region of 17.2 lakh crore, of which 11.9 lakh crore has been drawn, he said, adding that so far 5 lakh crore has been returned or withdrawn but it continues to do so a liquidity overhang of ₹8.5 lakh crore in the system due to the extraordinary measures of the pandemic.
“RBI will undertake a gradual and calibrated withdrawal of this liquidity over a multi-year non-stop period beginning this year,” Mr Das said.
The goal is to bring the size of the excess liquidity in the system back to levels consistent with prevailing monetary policy stances, he said, to ensure sufficient liquidity is made available to meet the economy’s productive needs.
Meanwhile, Mr. Das also announced that it has now been decided to increase the limit for inclusion of SLR-eligible (statutory liquidity ratio) securities in the held-to-maturity category to 23 to enable banks to better manage their Allowing investment portfolios in the fiscal year 23%.
Banks are also allowed to include securities purchased between April 1, 2022 and March 31, 2023 under the higher expanded limit of 23%, compared to 22% previously.
