RBI MPC Policy: Reversal of liquidity under SDF and MSF to be effective from December 30

For the banking sector, the RBI, in its monetary policy outcome on Friday, December 8, decided to take on the path of reversal of liquidity facilities under both SDF and MSF even during weekends and holidays, with effect from December 30, 2023.

SDF stands for Standing Deposit Facility, while MSF stands for Marginal Standing Facility.

“About the standing facilities of the Reserve Bank under the LAF, we have noticed simultaneous high utilisation of both MSF and SDF by the banks. This was pointed out in the last monetary policy statement,” said the governor’s statement.

SDF is a tool for absorbing liquidity and putting a curb on rising inflation. On the other hand, MSF is a tool through which banks can obtain liquidity overnight if interbank liquidity completely runs out.

“It is expected that this measure will facilitate better fund management by the banks. This measure will be reviewed after six months or earlier if needed, the statement added.

The RBI governor pointed out that the move will impact the banking sector. Suman Chowdhury, Chief Economist and Head – Research, Acuité Ratings & Research stated that the statement has also addressed the market concerns on liquidity by clarifying that OMO will be adopted only if required and currently, the liquidity is already in a relatively tight mode. Further, an operational issue for banks and money market participants has been resolved by permitting balance adjustments to the MSF and SDF in holidays and over the weekends. This will help in normalizing the sharp swings in system liquidity and prevent excessive volatility in call money or other short-term rates.