The Reserve Bank of India (RBI) logo is displayed at the entrance to the bank’s headquarters in Mumbai, India (Photographer: Kainaz Amaria/Bloomberg)  

Union Budget 2018 Paves The Way For RBI’s Standing Deposit Facility

The Union Budget has paved the way for the introduction of a new deposit facility, which can be used by the Reserve Bank of India to absorb excess liquidity. The Finance Bill has included an amendment which will allow for the Standing Deposit Facility to be introduced.

According to the Finance Act, the following clause shall be inserted in the RBI Act : “The accepting of money as deposits, repayable with interest, from banks or any other person under the Standing Deposit Facility Scheme, as approved by the Central Board, from time to time, for the purposes of liquidity management...”

The RBI has been arguing for such a facility for some time now. The proposal was first included in the Urjit Patel Committee report, which reviewed the monetary policy framework in 2014.

The tool will allow the RBI to suck out liquidity without offering government bonds as collateral. By using such a facility, the RBI may be able to avoid hiking the Cash Reserve Ratio abruptly, which is seen as much as an interest rate signal as a liquidity signal. The need for such a facility was felt in the aftermath of demonetisation when the RBI was running low on government bonds to offer as collateral in return for banks parking excess funds with it.

It is not clear how the interest rate offered on this facility will be determined.