Chart of the Day: The signs of tightening

The banking system’s liquidity is in the limelight again. Though it still remains surplus, that excess liquidity is now reducing fast.

An indicator of this is the standing deposit facility (SDF), which the Reserve Bank of India introduced in April.

The central bank made the SDF rate—currently at 4.65 percent—the floor of the overnight rate corridor and the marginal standing facility, which is at 5.15 percent, is the ceiling.

The policy repo rate, at 4.90 percent, is the nominal anchor around which the RBI seeks to keep the overnight call money rate.

Also read: What is the role of SDF in liquidity management?  

Amid the plethora of daily and fortnightly liquidity windows that the central bank operates, the SDF amount shows the excess idle funds that banks have.

Since it is the floor rate, subscription at the SDF is the true indicator of surplus liquidity, as banks have exhausted all avenues to deploying the liquidity and opted for the lowest possible return here.

Also read: Chart of the Day: A Fed-induced recession is here, fear markets

The SDF outstanding is coming down rapidly and was just a little above Rs 50,000 crore on July 27.

At the same time, sporadic borrowings at the daily repo auction have also been observed. It is no surprise that the overnight call money rate has inched above the repo rate now. This indicates not just a fall in liquidity surplus but also an uneven reduction.