The Reserve Bank of India has decided to allow reversal of liquidity facilities under both SDF (standing deposit facility) and MSF (marginal standing facility) even during weekends and holidays with effect from December 30, 2023, to address the situation arising out of simultaneous high utilisation of both these facilities by banks .

This move is expected to facilitate better fund management by the banks.

At present, the standing facilities of the Reserve Bank under the LAF (liquidity adjustment facility) – the SDF and the MSF – can be availed from 17:30 hours to 23:59 hours on all days including weekends and holidays.

However, the reversal of the facilities – withdrawal of deposited funds for SDF and repayment of borrowed funds for MSF – for the transactions over the weekends and holidays, is available only on the next working day in Mumbai.

The LAF corridor is symmetric around the policy repo rate (of 6.50 per cent), with the MSF rate (of 6.75 per cent) as the ceiling and the SDF rate (of 6.25 per cent) as the floor. 

Eligible entities

Under SDF, eligible entities can place deposits with the RBI on an overnight basis and earn 6.25 per cent interest. Under MSF, eligible entities can avail overnight funds at 6.75 per cent. 

“With regard to the standing facilities of the Reserve Bank under the LAF, we have noticed simultaneous high utilisation of both MSF and SDF by the banks. This was pointed out in the last monetary policy statement.

“We propose to address this situation and have decided to allow reversal of liquidity facilities under both SDF and MSF even during weekends and holidays…,” RBI Government Shaktikanta Das said in his monetary policy statement. 

It is expected that this measure will facilitate better fund management by the banks. This measure will be reviewed after six months or earlier, if needed.

System liquidity

Das said that system liquidity, as measured by the net position under the LAF, turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019.

Deficit liquidity conditions persisted during October and November prompting large recourse to MSF by banks. In parallel, utilisation of SDF has also been high.

In his October 6th monetary policy statement, Das had observed that elevated levels of MSF borrowings amidst substantial funds parked under the standing deposit facility (SDF) is symptomatic of skewed liquidity distribution in the banking system.

This got reflected in the firming up of the weighted average call rate (WACR) – the operating target of monetary policy, he then said.

Zarin Daruwala, Cluster CEO, India and South Asia markets (Bangladesh, Nepal and Sri Lanka), Standard Chartered Bank, said: “Allowing reversal of liquidity adjustment facility (LAF) on holidays and weekends will enable banks to better manage customer flows and this move also aligns well with RBI’s 24×7 payments framework.”