RBI’s SDF & MSF: Managing Surplus and Emergency Bank Liquidity
- vidyarthee2021
- Jul 4
- 2 min read
The Reserve Bank of India (RBI) has revised the operational timings for two key liquidity tools — the Standing Deposit Facility (SDF) and the Marginal Standing Facility (MSF) — which help manage liquidity in the banking system.
What is Standing Deposit Facility (SDF)?
Purpose: Allows banks to park surplus funds with RBI on an overnight basis.
Collateral-Free: Unlike other instruments, no collateral (like G-Secs)Â is required.
Liquidity Absorption Tool: Helps RBI absorb excess liquidity without the need to offer securities in return.
Introduced: In 2022 as a standing liquidity management tool under RBI’s monetary policy framework.
What is Marginal Standing Facility (MSF)?
Purpose: Enables banks to borrow from RBIÂ during times of acute liquidity stress.
Collateral-Based: Banks must pledge government securities to access this window.
Rate: Typically higher than repo rate, making it a penalty-rate borrowing tool.
Introduced: In 2011, to reduce volatility in the overnight money market.
UPSC Relevance
GS Paper 3: Indian Economy – Monetary policy, RBI tools, Liquidity management
Prelims: Terms like SDF, MSF, Repo, Reverse Repo frequently appear in UPSC questions
UPSC Prelims MCQ
Q. With reference to the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF), consider the following statements:
Both SDF and MSF require collateral in the form of government securities.
SDF is used to absorb surplus liquidity, while MSF is used to provide liquidity in emergencies.
SDF was introduced before MSF.
Which of the statements given above is/are correct?
A. 1 and 2 only
B. 2 only
C. 2 and 3 only
D. 1, 2 and 3
✅ Answer: B. 2 only
Explanation:
Statement 1 is incorrect: SDF does not require collateral, while MSF does.
Statement 2 is correct: SDF = Liquidity absorption; MSF = Liquidity support.
Statement 3 is incorrect: MSF was introduced in 2011, SDF in 2022.
UPSC Mains Question (GS Paper 3)
Compare and contrast Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) as tools of monetary policy. How do they help the Reserve Bank of India in managing liquidity in the economy?