The Reserve Bank of India (RBI) has decided to allow reversal of liquidity facilities under both SDF (standing deposit facility) and MSF (marginal standing facility) even during weekends and holidays to allow better liquidity management by the banks.

The new measure will come into effect from 30 December. It will be reviewed after six months.

The RBI uses the SDF tool to suck out excess liquidity in the banking system as part of Liquidity Adjustment Facility (LAF) corridor. Through the MSF, the central bank supplies liquidity when conditions are challenging.

"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 December 30, 2023. 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," RBI Governor Shaktikanta Das said while announcing the bi-monthly monetary policy on Friday.

System liquidity, as measured by the net position under the LAF, turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019. The RBI, however, expects liquidity conditions to ease as government spending picks up.

"Deficit liquidity conditions persisted during October and November prompting large recourse to the MSF by banks. In parallel, utilisation of the standing deposit facility (SDF) has also been high. The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances and Reserve Bank’s market operations,” Das said.

With the government spending recently picking up and system liquidity getting more evenly balanced among market participants, pressures have eased and the net LAF position has evened out broadly. Das expects government spending to further ease liquidity conditions.

Analysts believe the move will lead to a marginal savings in interest costs for banks.

“Given the 24X7 fund transfer facility available for customers, the banks face challenges on liquidity management over the weekend, when inter-bank markets are closed. Hence, as a matter of prudence they end up borrowing three-day funds in the inter-bank market and MSF window over the weekend. Similarly, banks with surplus liquidity end up locking the funds for three days under SDF over the weekend. With the proposal to reverse these three days MSF and SDF facility, we expect the volatility in call money rates to reduce and the extent of balances used in MSF and SDF facilities over the weekend to also moderate. However, given the overall tight liquidity in the banking system, we do not expect the call money rates to decline substantially. This will also lead to a marginal savings in interest costs for banks who end up borrowing and depositing in MSF and SDF respectively over the weekend,” said Karthik Srinivasan, senior VP, Group Head - Financial Sector Ratings, ICRA. Karthik Srinivasan, senior VP, Group Head - Financial Sector Ratings, ICRA.