Shifting gear

Prepare for rate hikes faster than expected

The Reserve Bank of India (RBI) last week decided to recalibrate its policy approach by shifting the stated focus back to price stability. Consequently, it normalised the policy corridor. However, instead of increasing the reverse repo rate, the RBI introduced another instrument called the standing deposit facility (SDF), which will act as the floor for the policy corridor. The central bank decided to keep the reverse repo rate unchanged, but it has been made somewhat redundant for normal circumstances. The introduction of the SDF gives more flexibility in managing liquidity and removes the constraint of providing collateral. The SDF rate