Answer-What is the purpose of the Standing Deposit Facility (SDF) introduced by the RBI in April 2022?

The Monetary Policy Committee MPC maintained a status quo on the policy repo rate between May 2020 and February 2022 after implementing a 115 basis points bps reduction between March 2020 and May 2020. Retail inflation has crossed the upper limit of RBIs tolerance band since January 2022. Sensing a serious risk to price stability, RBI initiated the monetary tightening cycle. In its April 2022 meeting, the committee introduced the Standing Deposit Facility SDF, which allowed for the deposit of excess funds by banks with the RBI without the necessity of collateral in the form of government securities, thereby allowing effective liquidity management in a collateral-free manner. The SDF, introduced at a rate of 3.75 per cent, replaced the reverse repo rate as the new floor of the Liquidity Adjustment Facility LAF corridor. The MPC also indicated a change in stance from Accommodative to Accommodative and focused on the withdrawal of accommodation, while supporting growth in this meeting, signalling the start of the monetary tightening cycle.