Budget 2018: Government to introduce ‘standing deposit facility’
Mumbai: The government has approved the long pending demand of the Reserve Bank of India (RBI) to introduce an uncollaterised deposit facility, adding one more tool to its liquidity management measures.
In his budget speech, finance minister Arun Jaitley said that the government is looking to amend the Reserve Bank of India Act to introduce standing deposit facility or SDF, which will help banks with excess funds to park it with RBI, without having to provide any collateral.
The central bank had recommended this tool following demonetization when banks witnessed a surge in cash deposit leading to a liquidity surplus of Rs4 trillion in March 2017. However, the government was yet to give its approval as it required amendment to the RBI Act.
Separately, a Mint article dated 15 May 2017 had cited that by allowing SDF, the government feared RBI will use this discretion to set an interest rate outside the purview of the monetary policy panel.
SDF was first proposed in the Urijit Patel committee report in January 2014. The new tool will help RBI define a floor rate in the inter-bank market, especially in liquidity surplus conditions. It also gives the central bank a window to intervene in both directions, when needed, to achieve the operating interest rate target.
However bankers feel that the introduction of this facility is ill-timed as liquidity has tightened and system wide loan book grew at 11.1% year-on-year as on 5 January, higher than the deposit growth of 4.5%.
“SDF was required earlier. Neverthless, it is one more monetary instrument to manage surplus liquidity. It may not be used immediately. But it’s good house keeping,” said Jayesh Mehta, managing director and country-treasurer at Bank of America Merrill Lynch.