News Excerpt:

The Reserve Bank of India has adjusted its liquidity management tools SDF and MSF as part of monetary policy review.

About the news:

• The RBI has decided to allow the reversal of marginal standing facility (MSF) and standing deposit facility (SDF) facilities on weekends and holidays for improved liquidity management.
• This new measure will come into effect from December 30 and will be reviewed after six months.
• It is expected that this measure will facilitate better fund management by the banks.

Liquidity Adjustment Facility (LAF):

• A liquidity adjustment facility (LAF) is a monetary policy tool used by the RBI.
• The RBI introduced the LAF as part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998. 
• LAF's help the RBI manage liquidity and provide economic stability by offering banks the opportunity to borrow money through repurchase agreements or repos or to make loans to the RBI via reverse repo agreements.
• LAF’s can manage inflation in the economy by increasing and reducing the money supply.

Standing Deposit Facility (SDF):

• The idea of an SDF was first mooted in the Urjit Patel Monetary Policy Committee report in 2014. Further, the Reserve Bank of India (RBI) in 2022 announced the introduction of the Standing Deposit Facility (SDF).
• It is the tool to absorb excess liquidity. Banks can park as much money with it as they want without getting collateral, and at a lower rate than the reverse repo rate.
• The SDF helps the central bank in absorbing excess liquidity (deposits) from commercial banks without giving government securities in return to the banks.
• Prior to its introduction, when the central bank had to absorb a tremendous amount of money from the banking system through the reverse repo window, which became difficult for it to provide the required volume of government securities in return.
• This happened during the time of demonetisation (2016).
• In this sense, the SDF is a collateral-free arrangement meaning that RBI need not give collateral for liquidity absorption while the reverse repo rate was a collateralised facility.
• Currently, SDF rate is 6.25%.

Marginal Standing Facility (MSF):

• By using the Marginal Standing Facility or MSF, the concerned banks borrow money from the central bank which is done by pledging the government securities at a rate higher than the Repo Rate.
• This helps the banks to obtain quick money in the period of 24 hours.
• It is used as an emergency tool by the banks to obtain liquidity.
• The Reserve Bank of India (RBI) introduced the Marginal Standing Facility (MSF) in the year 2011-12 in order to help banks in emergency situations. This would also help the RBI to maintain the money flow in the economy.
• Through the Marginal Standing Facility (MSF), RBI supplies liquidity when conditions are challenging. Currently MSF rate is at 6.75%.

Prelims PYQ

Q. The RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (UPSC 2020)

1. Cut and optimize the Statutory Liquidity Ratio
2. Increase the Marginal Standing Facility Rate
3. Cut the Bank Rate and Repo Rate

Select the correct answer using the code given below:

(a) 1 and 2 only

(b)  2 only

(c) 1 and 3 only

(d)  1, 2 and 3

Mains PYQ

Q. Do you agree with the view that steady GDP growth and low inflation have left the Indian economy in good shape? Give reasons in support of your arguments. (UPSC 2019)