Banks Shift from SDF to VRRR as Overnight Rates Firm Up
Why in the news
Early in July 2025, banks moved money out of the SDF into RBI’s VRRR auctions, cutting SDF balances sharply.
Key facts
- SDF balance: ₹1.2 trillion, versus ₹3.26 trillion at the start of July 2025.
| Feature | VRRR | SDF |
|---|---|---|
| Mechanism | Auction-based liquidity absorption | Standing window to park surplus funds |
| Rate | Found by competitive bids; typically at or slightly above the reverse repo rate | Interest earned by banks |
| Collateral | Not discussed | RBI gives no securities in return |
| Purpose | Used during excess liquidity to curb inflation and keep monetary stability | Lets banks hold idle cash safely |
Background
Under the older reverse repo route, RBI handed banks government securities as collateral. SDF dropped that requirement.
Exam angle
- VRRR = Variable Rate Reverse Repo; SDF = Standing Deposit Facility, collateral-free for RBI.