What is Standing Deposit Facility (SDF) - UPSC Economy Notes

Standing Deposit Facility (SDF) – Simplified Explanation What is SDF? Standing Deposit Facility (SDF) is a tool used by the Reserve Bank of India (RBI) to absorb excess money from banks without giving them collateral (security). Why is SDF needed? Banks often have extra money that they deposit with RBI to earn some interest. Earlier, the RBI used Reverse Repo Rate for this, where it would take money from banks and give government securities as collateral. But sometimes, RBI may not have enough securities to offer. To solve this issue, SDF allows banks to deposit money with RBI without needing any security . Example to Understand SDF Easily Imagine you have a piggy bank where you store extra money. Now, instead of keeping it at home, a bank offers you a safe deposit facility where they will hold your money safely and even pay you some interest —but they won’t give you anything in return, like gold or property, as a guarantee. This is exactly what happens in SDF. Banks deposit their extra money…