Standing Deposit Facility (SDF) – RBI’s Liquidity Tool

When banks have extra money, what do they do with it? SDF is a mechanism that helps manage such extra liquidity in the economy. SDF’s full form in banking is Standing Deposit Facility. 

Key Highlights of Standing Deposit Facility (SDF)

• Introduced by the Reserve Bank of India in April 2022.

• Serves as the floor of the Liquidity Adjustment Facility corridor.

• Enables banks to deposit surplus funds with the RBI.

• Has replaced the Fixed Rate Reverse Repo as the primary liquidity absorption tool.

In this blog, we will share all the basics surrounding the Standing Deposit facility, the SDF rate, and the need for SDF RBI for liquidity management.

Standing Deposit Facility Meaning – SDF in Banking System

The Standing Deposit Facility (SDF) is a collateral-free overnight monetary policy tool introduced by the Reserve Bank of India in April 2022 to absorb surplus liquidity from the banking system. It acts as the lower bound of the Liquidity Adjustment Facility (LAF) corridor, allowing banks to park excess funds with the RBI without providing government securities.

Features of the Standing Deposit Facility

• Collateral-free facility:

Unlike the traditional reverse repo, the RBI does not need to provide government securities when absorbing liquidity through the SDF.

• Floor of the LAF corridor:

The SDF rate is kept 25 basis points below the policy repo rate, making it the lower bound of the Liquidity Adjustment Facility corridor.

• Active rate alignment:

The RBI adjusts the SDF rate along with the repo rate to maintain the 25 basis point corridor. For example, in December 2025, with the repo rate at 5.25 percent, the SDF rate was 5.00 percent.

• Overnight and flexible tenure:

The facility is mainly used for overnight liquidity absorption, although the RBI can extend the tenure with appropriate pricing when required.

• Discretionary participation:

Banks can voluntarily park excess funds with the RBI through the SDF.

• Electronic execution:

SDF operations are conducted through the RBI’s e-Kuber system, including on weekends and holidays.

• SLR eligibility:

Deposits made under the SDF are considered eligible assets for maintaining the Statutory Liquidity Ratio.

• Not eligible for CRR:

Funds deposited under the SDF cannot be counted towards Cash Reserve Ratio balances.

• Handles large liquidity surpluses:

The SDF enables the RBI to absorb very large liquidity surpluses, sometimes exceeding ₹1 trillion, without being constrained by the availability of government securities.

• Primary liquidity management tool:

The SDF is now widely used for mopping up excess liquidity, often replacing the fixed rate reverse repo.

• Supports inflation control and monetary transmission:

By withdrawing excess money from banks, it helps manage inflation and keep short term market rates such as the Weighted Average Call Rate within the policy corridor.

Why did the RBI introduce SDF?

The RBI introduced the Standing Deposit Facility as a way to manage liquidity in the economy, especially after the COVID-19 pandemic, which led to a significant increase in funds within the banking system.
Excess liquidity in the financial system can create inflationary pressures and make monetary policy implementation more challenging.

SDF in banking was introduced for the following reasons:

• To manage the post-pandemic liquidity surplus: Large capital inflows and stimulus measures increased liquidity in the banking system, requiring a more efficient absorption mechanism.

• To improve flexibility in monetary policy operations: The SDF provides the RBI with a more efficient tool for managing short-term liquidity compared with earlier liquidity management mechanisms.

• To remove collateral constraints in liquidity absorption: Since the facility is uncollateralised, the RBI can absorb large volumes of liquidity without relying on the availability of government securities.

• To strengthen monetary policy transmission: By helping maintain a clear interest rate structure in the banking system, the SDF supports the effective transmission of policy rate changes.

• To maintain financial stability: Managing excess liquidity helps control inflationary pressures and supports stability in the financial system.

How Does the Standing Deposit Facility Affect Liquidity?

The Standing Deposit Facility plays a central role in maintaining liquidity balance in the banking system. By providing banks with a safe place to deposit excess funds, the RBI can influence short-term interest rates and control the overall flow of money in the economy.

• Stabilises money market rates: By setting the SDF rate as the floor of the Liquidity Adjustment Facility corridor, the RBI ensures that overnight market rates do not fall significantly below this level.

• Improves monetary policy transmission: When the RBI changes policy rates such as the repo rate, the SDF rate adjusts accordingly, helping transmit policy signals to the broader financial system.

• Prevents excessive lending during liquidity surpluses: During periods when banks have abundant liquidity, SDF discourages uncontrolled lending by offering a risk free parking option with the RBI.

• Supports inflation management: By absorbing excess liquidity, the RBI can reduce inflationary pressure and maintain financial stability.

• Strengthens liquidity management flexibility: Since the facility does not require collateral, the RBI can absorb very large volumes of liquidity without being constrained by the availability of government securities.

MSF and SDF: Marginal Standing Facility vs Standing Deposit Facility 

The Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) are two key liquidity management tools used by the Reserve Bank of India under the Liquidity Adjustment Facility framework. 

What is MSF and SDF?

While SDF is used to absorb surplus liquidity from banks, MSF allows banks to borrow funds from the RBI during liquidity shortages.

Key Differences Between MSF and SDF

Basis	Standing Deposit Facility (SDF)	Marginal Standing Facility (MSF)
Purpose	Absorbs excess liquidity from the banking system	Provides emergency liquidity to banks
Direction of liquidity	Liquidity absorption	Liquidity injection
Collateral requirement	No collateral required	Banks must pledge securities from their SLR portfolio
Interest rate position	Usually, 25 basis points below the repo rate	Usually 25 basis points above the repo rate
Role in the LAF corridor	Acts as the floor of the LAF corridor	Acts as the upper bound of the LAF corridor
Usage by banks	Banks park surplus funds with the RBI	Banks borrow funds from the RBI during short-term liquidity stress
Nature of facility	Collateral-free deposit facility	Emergency borrowing facility

• SDF: Used when banks have too much money and want to park surplus funds safely with the RBI.
• MSF: Used when banks face a shortage of funds and need to borrow from the RBI overnight.

What is the new timing of SDF and MSF?

The operational timing of the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) is 7:00 PM to 11:59 PM daily. The Reserve Bank of India revised these timings from July 1, 2025, to align them with the extended hours of the call money market.

Reverse Repo Rate and Standing Deposit Facility (SDF): How Do They Differ

As of February 2026, the repo rate is 5.25%, the SDF rate is 5.00%, and the reverse repo rate is 3.35%, forming part of the RBI’s liquidity management framework under the Liquidity Adjustment Facility.

Basis	Reverse Repo Rate	Standing Deposit Facility (SDF)
Meaning	The interest rate at which the RBI borrows money from commercial banks against government securities	The interest rate at which the RBI absorbs surplus liquidity from banks without providing collateral
Purpose	Helps manage liquidity by allowing banks to deposit surplus funds with the RBI	Absorbs excess liquidity from the banking system without requiring government securities
Collateral	Requires government securities as collateral	No collateral required
Role in policy framework	Part of the RBI liquidity management toolkit	Acts as the floor of the Liquidity Adjustment Facility corridor
Current rate (Feb 2026)	3.35%	5.00%
Relation to repo rate	Lower than the repo rate	Usually, 25 basis points below the repo rate
Impact on liquidity	Encourages banks to lend surplus funds to the RBI	Encourages banks to park surplus funds with the RBI to absorb liquidity

What is the difference between the Repo Rate and the SDF?

The repo rate is the rate at which the RBI lends money to banks, usually against government securities. In contrast, the Standing Deposit Facility is the rate at which the RBI absorbs excess liquidity from banks without requiring collateral.

Conclusion

SDF is expected to enhance the effectiveness of the RBI’s monetary policy. It also aims to promote investment in the economy. However, SDF may affect the demand and supply of government securities and discourage the banks from lending to the private sector.

Standing Deposit Facility (SDF) – FAQs

Source: rbi.org.in

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