Context:
Banks’ average SDF placements rose to ₹2.13 trillion in March 2025, up from ₹1.12 trillion in February. SDF accounted for 82.6% of the total liquidity absorbed under RBI’s Liquidity Adjustment Facility (LAF) during H2FY25.
Key Drivers Behind Higher SDF Reliance
- 24×7 payment systems have increased transaction unpredictability, prompting precautionary fund parking.
- Just-in-time treasury transfers reduce float money availability with banks.
- Banks are opting for overnight liquidity comfort due to fear of late-hour reserve shortfalls.
Shift from Longer-Tenor Instruments
- Banks are less inclined to use Variable Rate Reverse Repo (VRRR) operations due to SDF’s immediate liquidity flexibility.
- Indicates a preference for short-duration, non-collateralized options in tight liquidity scenarios.
RBI’s Operational Framework Enhancements
- Since April 2022, the SDF replaced the fixed-rate reverse repo as the floor of the LAF.
- The SDF rate is 25 basis points below the repo rate; MSF is 25 bps above, re-establishing the 50 bps LAF corridor.
Strategic Impact and Liquidity Implications
- The increased reliance on SDF reflects a cautious liquidity management approach amid structural shifts in banking operations.
- The RBI’s revised liquidity tools align with global best practices of providing non-collateralized overnight deposit facilities.
