Standing Deposit Facility (SDF)
The Standing Deposit Facility (SDF) is a collateral-free overnight deposit window introduced by the Reserve Bank of India in April 2022 that allows banks to park surplus liquidity with the RBI at a rate below the repo rate, replacing the fixed-rate reverse repo as the floor of the LAF corridor.
Prior to April 2022, the Reserve Bank of India's Liquidity Adjustment Facility (LAF) corridor had the repo rate as the ceiling (at which banks borrow from the RBI) and the fixed-rate reverse repo as the floor (at which banks park surplus funds with the RBI). However, the reverse repo window required the RBI to provide collateral—typically government securities—against which it absorbed liquidity. During the COVID-19 era of massive surplus liquidity, this created a structural problem: the RBI's available collateral stock was insufficient to absorb the huge quantum of excess funds in the system.
The SDF, recommended by the Internal Working Group of the RBI, was introduced in the April 2022 monetary policy as a cleaner, collateral-free solution. Banks can deposit surplus funds with the RBI under the SDF at a fixed rate set 25 basis points below the repo rate. Unlike the reverse repo, the RBI does not need to provide any government securities as collateral, enabling it to absorb theoretically unlimited liquidity. The SDF rate thus became the new effective floor of the LAF corridor.
The corridor structure post-April 2022 is as follows: the Marginal Standing Facility (MSF) rate is 25 bps above the repo rate (ceiling), the repo rate is the policy rate (middle), and the SDF rate is 25 bps below the repo rate (floor). The reverse repo, while still technically active, became largely dormant as banks shifted to parking funds at the SDF.
The SDF is operationally simpler than the reverse repo because its collateral-free nature removes the securities management complexity. For banks, it offers a risk-free overnight return on surplus funds. For the RBI, it provides a powerful new absorption tool that is not constrained by the size of its government securities balance sheet.
Since its introduction, the SDF has been the dominant overnight liquidity absorption tool during periods of surplus banking system liquidity. The quantum of funds parked daily at the SDF is disclosed in the RBI's daily liquidity data releases, making it a key indicator of the prevailing liquidity condition in the Indian banking system.