The Reserve Bank of India has designed a very effective liquidity management system under the Liquidity Adjustment Facility (LAF). The LAF, launched in June 2000, has been evolved into a sophisticated liquidity support system for the Indian banking sector with several instruments. Overnight facilities of repo and reverse repo were the most popular tools for liquidity injection and liquidity absorption till two years back (both inactive now). But now, the RBI is having an array of instruments like Variable Rate Repo and Variable Rate Reverse Repo (main instruments) for managing liquidity. Along with this, the two most frequently used liquidity adjustment facility instruments are the Marginal Standing Facility and the Standing Deposit Facility. Both these instruments are overnight or one day facilities to get money from the RBI (MSF) or to park excess money with the RBI (SDF). The data about the turnover on various LAF instruments also shows that these two instruments are the most used ones by the banks.
What is Marginal Standing Facility?
The Marginal Standing Facility (MSF) is an overnight liquidity support scheme by the RBI to provide funds (liquidity injection) to commercial banks with a higher interest rate over the repo rate. Basically, the MSF is an emergency liquidity facility and is available on all working days and on most of the holidays. MSF can be used by a bank even if it exhausts its eligible security holdings for borrowing under other options like the LAF repo.
What is Standing Deposit Facility?
The Standing Deposit Facility (SDF) is a collateral-free liquidity absorption mechanism introduced by the RBI to absorb excess liquidity from the banks by providing an interest payment. The SDF was introduced on April 8, 2022. There are several mechanisms already used by the RBI to withdraw excess liquidity in the banking system and the popular one was the reverse repo. The unique feature of SDF is that it is a collateral free liquidity absorption mechanism to absorb liquidity from the commercial banking system into the RBI. Collateral free means the RBI will not give any collateral like G-Secs while bank gives funds to the RBI. Government in the Budget’s (2018) Finance Act included a provision for the introduction of the Standing Deposit Facility (SDF).
Related Article: Monetary Policy of the RBI- the Basics Simplified.
The MSF and SDF are the two standing facilities of the RBI.
The following table gives a detailed analysis of the difference between MSF and SDF.
|Marginal standing facility
|Standing deposit facility
|Injection of liquidity to banks; financial stability tool and a liquidity a liquidity management tool.
|Absorption of liquidity from banks, liquidity management tool.
|Nature of working
|Emergency facility where the RBI gives liquidity to banks; banks get money while paying interest to the RBI.
|Absorption of liquidity by the RBI from banks, where the banks park their excess funds with the RBI while getting interest from the RBI.
|One day facility
|One day facility, still the RBI retains the flexibility to absorb liquidity for longer tenors with appropriate interest rate, as and when the need arises.
|On all days (including days, changes may occur with RBI notification): between 17:30 hrs to 23:59 hrs
|On all days, Sundays and holidays- available between 17:30 hrs to 23:59 hrs.
|Quantity of funds
|Up to a prescribed per cent of the bank’s NDTL.
|Financial institutions who can avail the facility
|All Scheduled Commercial Banks (including RRBs, SFBs and PBs) having Current Account and SGL with the RBI, Scheduled UCBs and Scheduled State Cooperative Banks.
|All Scheduled Commercial Banks (including Regional Rural Banks), Small Finance Banks (SFBs), Payments Banks, Local Area Banks (LABs), Primary (Urban) Co-operative Banks (UCBs), State Co-operative Banks (StCBs) and District Central Co-operative Banks (DCCBs).
|MSF rate will be higher than the repo rate. The rate difference between the repo rate and MSF rate is set by the RBI in accordance with the underlying circumstances.
|As of now, the interest rate is below the repo rate and will be set by the RBI from time to time.
|Allows banks to avail funds even if banks don’t have eligible securities (securities over and above their SLR requirements) over the SLR. Or in other words, it allows banks to avail funds by dipping SLR by up to a given per cent (usually upto 2%) of net demand and time liabilities (NDTL). LAF can generally be availed above the SLR holding level.
|Standing Deposit Facility is collateral free. This means that banks will not get any collateral in return while parking their funds with the RBI. Most other facilities by the RBI necessitates provision of collateral (mostly G-secs) by the counter party.
|Need collateral: MSF will be undertaken in all SLR-eligible transferable Government of India dated Securities/Treasury Bills and State Development Loans (SDL).
|No collateral is needed
|Mode of application
|Preferably through Negotiated Dealing System (NDS).
|RBI’s e-Kuber system.
|The RBI reserves the right to accept/reject MSF applications partially or fully.
|Any other feature
|MSF rate acts as the upper ceiling of the LAF corridor.
|The SDF replaced the fixed rate reverse repo (FRRR) as the floor of the LAF corridor. SDF fund is not eligible as cash reserve ratio but will be eligible to be counted under SLR.
|May 9, 2011.
|April 8, 2022.
Related Article: What is Marginal Standing Facility?
Related Article: What is Standing Deposit Facility?
Introduction of MSF: https://rbi.org.in/scripts/NotificationUser.aspx?Id=6394&Mode=0
Introduction of MSF for RRBs: https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12004
Introduction of MSF for Scheduled Cooperative Banks: https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=11361
The MSF and SDF will be available on all days of the week: https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=53536