RAS question
The Standing Deposit Facility (SDF) rate introduced by RBI in April 2022 serves as the:
Correct answer: (D) Floor of the LAF interest rate corridor.
The Standing Deposit Facility rate introduced by the RBI in April 2022 serves as the floor of the Liquidity Adjustment Facility interest rate corridor.
Explanation
The SDF rate is the lower bound of the RBI's Liquidity Adjustment Facility corridor. In its Monetary Policy Statement dated 8 April 2022, the RBI said the standing deposit facility rate would now be the floor of the LAF corridor and placed it at 3.75 per cent, while the policy repo rate stayed at 4.0 per cent. SDF replaced the fixed-rate reverse repo as the floor, is set 25 basis points below the repo rate, and unlike reverse repo does not require government securities as collateral. That collateral-free design gives the RBI more flexibility when absorbing surplus liquidity from the banking system.
Why the other options are wrong
- (A) A bank lending benchmark rate guides lending rates, whereas SDF is a liquidity absorption rate placed at the lower end of the LAF corridor.
- (B) A government borrowing rate relates to how the government raises funds, while SDF is an RBI monetary policy facility used within the LAF framework.
- (C) The ceiling of the LAF corridor is the MSF rate, not SDF; SDF is the floor.
Concept
This tests monetary policy operating framework, especially the LAF corridor and RBI liquidity management. It recurs in RAS because questions often ask aspirants to distinguish repo, reverse repo, MSF and newer instruments such as SDF.