RBI has introduced a new monetary policy tool named as Standing Deposit Facility to suck excess liquidity from the banking system without any collateral. This Standing Deposit Facility tool was recommended by current RBI Governor Mr Urjit Patel’s committee on monetary policy framework in 2014, while finance act 2018 included the provisions for its introduction. This tool will help the RBI to suck excess money from the banking system so that it can control inflation, interest rates, lending rates etc. To do that there will not be any requirement to give government securities to banks as collateral while interest will be paid to banks for there funds with the RBI. The important thing to notice here is that there will not be any limit under the standing deposit facility, RBI can suck as much money as banks want to park with it.
How the Standing Deposit Facility is different from the Market Stabilization Scheme?
Market Stabilization Scheme (MSS) was somewhat similar to the newly introduced Standing deposit facility (SDF), while there are some important points to note out, as given below:
- Collateral was required under MSS while it is exempted under the SDF scheme.
- Limit for MSS was 30,000 crore initially which was increased to 6 lakh crore to adjust the excess funds (NDTL) of banks in the wake of demonetisation, while there is no monetary limit in SDF.
- Interest will be paid to banks for there funds in both the cases and the interest rate is lower than Repo Rate.
- MSS was introduced by an agreement between RBI and Government of India to give autonomy to RBI to manage liquidity in the system when the government doesn’t want to borrow money through the open market operations and RBI fells short of government securities, while SDF was recommended by Urjit Patel Committee.
- Cash Management Bill (CMB), Treasury Bills, etc were the tools under MSS while these are not required under SDF.