RBI tweaks ecosystem to ease market liquidity

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MUMBAI : The Reserve Bank of India’s (RBI) move to allow banks more flexibility in managing funds over weekends and on holidays will help smoothen the functioning of the money market and in reducing cost, according to traders. The central bank governor Shaktikanta Das, while announcing RBI’s monetary policy review said it will allow banks to move and borrow between the standing deposit facility (SDF) and marginal standing facility (MSF) during weekends and holidays from 30 December.

This will be reviewed after six months. “With regard to 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. We propose to address this situation and have decided to allow reversal of liquidity facilities under both SDF and MSF even during weekends and holidays with effect from 30 December 2023," said RBI.

Now banks can park money in SDF and borrow from MSF on holidays, but can reverse those transactions only on working days. The SDF is a collateral-free liquidity absorption mechanism implemented by RBI with the intention of transferring liquidity out of the commercial banking system and into RBI.

“As the banking system is using both MSF and SDF window simultaneously due to heterogenous liquidity condition and some funding mismatches during weekend and holidays, RBI has allowed reversal of liquidity facilities under SDF and MSF even during weekend and holidays. This will help smoothen the money market operation of banks as well as be cost effective for banks as they will use only one window during weekend or holidays and save on spread between MSF and SDF, which is 50 bps," said Gopal Tripathi, head