Record SDF Deposits and Liquidity Management in India
The recent financial activities in India have seen lenders park a record ₹5.6 lakh crore in the Reserve Bank of India's (RBI) standing deposit facility (SDF). This move is a result of surplus liquidity and the spread between overnight rates and the SDF rate.
Key Factors and Financial Activities
- Lenders are borrowing overnight funds from the tri-party repo dealing system (TREPS) market at rates as low as 4.66%.
- These funds are then parked at the RBI’s SDF with a rate of 5%, yielding a potential gain of 70-80 basis points.
Understanding SDF and Its Role
- The SDF, introduced four years ago, is a monetary policy tool designed to absorb excess liquidity.
- It serves as the floor of the Liquidity Adjustment Facility (LAF) corridor, allowing banks to earn interest on overnight deposits.
Current Liquidity Situation
- As of a recent Thursday, banking system liquidity was at a four-year high of ₹4.55 lakh crore.
- The April average was ₹3.80 lakh crore, compared to ₹1.57 lakh crore in March and ₹2.53 lakh crore in February, as per RBI data.
Central Bank Measures
To manage this high liquidity, the RBI announced a ₹2 lakh crore Variable Rate Reverse Repo (VRRR) operation, the first in four months, to anchor overnight money market rates which had fallen below the LAF corridor.
Impact of Upcoming G-Sec Redemptions
- Two Government Securities (G-Sec) redemptions scheduled are set to inject a total of ₹1.21 lakh crore into the banking system.
- The redemption specifics include ₹86,400 crore on April 10 and ₹34,800 crore on April 17.
- Despite the expected liquidity drain from the Goods and Services Tax (GST), system liquidity will remain high due to these redemptions.
