Liquidity withdrawal will be done in multi-year time frame: RBI Governor

RBI Governor Shaktikanta Das (File Image)

The Reserve Bank of India (RBI) has implemented a 3.75 percent Standing Deposit Facility (SDF) as part of its liquidity management strategy. The Central bank has introduced the Standing Deposit Facility (SDF) at 3.75 percent to absorb excess liquidity. It has also decided to restore the Liquidity Adjustment Facility (LAF) corridor and Marginal Standing Facility (MSF) at 4.25 percent.

The RBI Governor said the introduction of Standing Deposit Facility would provide symmetry to operating framework of monetary policy.

Stating that the economic activity is barely above pre-pandemic levels but continues to steadily recover, RBI Governor Shaktikanta Das said the Central bank would engage in a gradual withdrawal of liquidity over a multi-year timeframe beginning this year.

"RBI will engage in gradual, multi-year withdrawal of Rs 8.5 lakh crore excess liquidity in system," Shaktikanta Das said.

During the last two years, RBI offered liquidity facilities of the order Rs 17.2 lakh crore of which Rs 11.9 lakh crore was utilised, he said, adding that Rs 5 lakh crore has been returned or withdrawn so far but there continues to be a liquidity overhang of Rs 8.5 lakh crore in the system because of the extraordinary measures of the pandemic.

“The extraordinary liquidity measures undertaken in the wake of the pandemic, combined with the liquidity injected through various other operations of the RBI have left a liquidity overhang of the order of Rs 8.5 trillion in the system,” the RBI governor said.

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The RBI governor also said, "Withdrawal of liquidity to be multi-year, can be two years, can be three years. It will depend on the evolving situation."

“The objective is to restore the size of the liquidity surplus in the system to a level consistent with the prevailing stance of monetary policy,” Shaktikanta Das said.

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Das further said RBI will continue to adopt a nuanced, nimble approach to liquidity management while ensuring adequate liquidity in the system.

“While doing so, I would like to reiterate our commitment to ensure the availability of adequate liquidity to meet the productive requirements of the economy. We also remain focussed on completion of the borrowing programme of the Government and towards this end the RBI will deploy various instruments as warranted,” the RBI Governor added.

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The SDF enables the RBI to absorb liquidity from commercial banks without having to give the banks government securities in exchange. When longer-term liquidity is required, the SDF will be able to absorb it.

The SDF has its origins in a 2018 amendment to the RBI Act and is an additional tool for absorbing liquidity without any collateral.