Standing Deposit Facility

Also called: SDF · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

The Standing Deposit Facility (SDF) is an overnight window of the RBI. Banks and other LAF participants can park their spare money there at any time, and the RBI does not have to give them any collateral (security such as government bonds) in return. Its rate is repo − 25 bps [1]. It is the floor (lowest point) of the policy rate corridor.

It matters because the RBI can soak up very large amounts of extra cash without running out of government bonds. That keeps overnight market rates from falling far below the repo rate.

Formula: SDF rate = Repo rate − 0.25 percentage points (25 bps) [1]

Explanation

How it works

• Standing facility: a window that is always open. Banks use it on their own. They do not wait for an RBI auction.
• The deposit:
• A bank with spare cash at the end of the day deposits it with the RBI overnight.
• The next day it gets the money back, plus interest at the SDF rate.

• The RBI gives the bank no government bonds as security. The RBI calls these "uncollateralised deposits" and accepts them from all LAF participants [2][1].

• Direction: the SDF absorbs liquidity. Liquidity means the ready cash in the banking system. Money parked at the SDF leaves the market.

• Place in the LAF: the Liquidity Adjustment Facility (LAF) is the RBI's system of repo, reverse repo and standing facilities, used to manage day-to-day cash in banks. Today the SDF is one of its parts, together with the MSF and the repo and reverse repo operations [1].

Why it is the floor of the corridor

• The policy rate corridor is the band inside which overnight interest rates move [1][2]:
• Floor = SDF rate
• Middle = repo rate (the rate at which the RBI lends to banks for a short time against government bonds)

• Ceiling = MSF rate

• The logic of the floor:

• A bank can always earn the SDF rate from the RBI, with no risk.
• So no bank will lend to another bank in the market for less than the SDF rate.
• So the market's overnight rate does not fall below the SDF rate.

Why no collateral matters

• The old problem with the reverse repo:
• Under a reverse repo, the RBI takes the bank's cash and must give the bank government bonds as collateral.
• When banks have a very large surplus, the RBI can run short of bonds to give.

• So how much cash the RBI could absorb depended on how many bonds it held.

• How the SDF fixes this:

• The SDF needs no collateral.
• So the RBI can absorb any size of surplus, whatever its bond holdings.

Worked example

• Rates from the 5 December 2025 policy: SDF = 5.00% [3].
• A bank parks ₹1,000 crore at the SDF for one night.
• Interest earned = 1,000 × 5.00% ÷ 365 ≈ ₹0.137 crore (about ₹13.7 lakh).
• If the bank lent the same money in the call market (where banks lend to each other for one day) at 4.90%, it would earn less. So it will not lend below 5.00%. This is why the SDF rate works as the floor.

In India

• Managed by: the Reserve Bank of India (RBI), as part of its operating framework for monetary policy.
• Introduced: April 2022.
• Legal basis: Section 17(2A) of the RBI Act, 1934, which was added by the Finance Act 2018.
• What it replaced: the SDF took over as the floor from the fixed-rate reverse repo (3.35% at the time). The fixed-rate reverse repo is now used only at the RBI's discretion, for purposes the RBI specifies from time to time [1].
• Current rates (5 December 2025 policy, neutral stance) [3]:

Floor	Policy rate	Ceiling
SDF 5.00%	Repo 5.25%	MSF = Bank Rate 5.50%

• Corridor width = 5.50 − 5.00 = 50 bps, with 25 bps on each side of repo.
• Link to the operating target: the RBI's operating target is the Weighted Average Call Rate (WACR), the average overnight rate between banks, weighted by the size of each deal [1].
• When the system has a liquidity surplus, WACR is pulled toward the SDF rate.

• The RBI then runs a Variable Rate Reverse Repo (VRRR) auction to absorb the extra cash and lift WACR back toward the repo rate [1].

• (Check the latest rates before the exam. The MPC may have changed them after December 2025.)

Don't confuse with

• Reverse repo: the RBI absorbs cash but gives government bonds as collateral. The SDF needs no collateral. The fixed-rate reverse repo (3.35%) is no longer the floor [1].
• Marginal Standing Facility (MSF): the opposite direction. Under the MSF, banks borrow from the RBI overnight at a penal rate of repo + 25 bps, which makes it the ceiling. The SDF is for depositing at repo − 25 bps, which makes it the floor [1].
• VRRR: also absorbs cash, but it is an auction run when the RBI decides to hold one, and the rate comes from banks' bids. The SDF is a standing window at a fixed rate that banks can use at any time [1].
• Cash Reserve Ratio (CRR): a compulsory share of NDTL (roughly, a bank's deposits) kept with the RBI, and it earns no interest. The SDF is voluntary and earns the SDF rate.

Prelims Hooks

• The SDF began in April 2022. Its legal basis is Section 17(2A) of the RBI Act, 1934, added by the Finance Act 2018 (not by an RBI circular or by the Banking Regulation Act).
• SDF rate = repo − 25 bps [1]. In December 2025 it was 5.00%, with repo at 5.25% [3].
• The SDF is collateral-free. The reverse repo needs collateral. A classic "which of the following" trap.
• Corridor: floor = SDF, ceiling = MSF (= Bank Rate), width = 50 bps [1][3].
• The SDF replaced the fixed-rate reverse repo (3.35%) as the floor. The reverse repo is now used only at the RBI's discretion [1].
• In a liquidity surplus, WACR moves toward the SDF rate. In a deficit, WACR moves toward the MSF rate.

Mains Points

• A legal change that enabled a monetary tool:
• Before the SDF, the RBI could absorb extra cash only if it had enough bonds to give as collateral.
• The Finance Act 2018 inserted s.17(2A), which allowed collateral-free deposits. The SDF was then launched in April 2022.

• This is a good GS-III example of how changes to the law shape what a central bank can do.

• A firmer floor helps transmission (how a change in the repo rate passes to loan and deposit rates):

• Big surpluses come from heavy RBI dollar buying or large government spending, which add rupee cash.
• Without a firm floor, WACR can fall far below repo, and the RBI's rate signal gets weaker.

• The SDF keeps WACR inside the corridor, so markets can read the policy rate clearly [1].

• Limits of the SDF:

• The SDF only stops overnight rates from falling below the floor. It does not remove long-lasting surpluses.
• Short-lived surpluses still need VRRR auctions, and long-lasting ones need open market operations or CRR changes.
• So the SDF supports active liquidity management but cannot replace it [1].

Related concepts

• Liquidity Adjustment Facility
• Variable Rate Repo
• Variable Rate Reverse Repo
• Marginal Standing Facility
• Policy rate corridor
• Weighted Average Call Rate
• Banking system liquidity

Read more

• The operating framework: LAF, the corridor and WACR