Context:
The amount parked by banks in the Reserve Bank of India’s (RBI’s) Standing Deposit Facility (SDF) has dropped sharply to ₹1.2 trillion, down from ₹3.26 trillion at the beginning of July 2025. This shift follows RBI’s Variable Rate Reverse Repo (VRRR) auctions aimed at absorbing surplus liquidity.
What is Variable Rate Reverse Repo (VRRR)?
- VRRR is a liquidity absorption mechanism where banks park surplus funds with the RBI.
- Conducted via auctions, the interest rate is market-determined through competitive bidding.
- Typically, the VRRR rate is equal to or slightly higher than the standard reverse repo rate.
- VRRR is deployed when the banking system has excess liquidity, making it an effective tool to:
- Curb inflationary pressures
- Maintain monetary stability
What is the Standing Deposit Facility (SDF)?
The Standing Deposit Facility (SDF) is a tool introduced by the RBI to absorb surplus liquidity from the banking system without providing any collateral.
Traditionally, when banks had excess funds, they could deposit them with the RBI and earn interest through the reverse repo mechanism, but the RBI had to provide government securities as collateral in exchange. The SDF changes that—it lets banks park their surplus funds securely with the RBI while earning an interest rate, and the RBI doesn’t need to part with any assets in return.
