Marginal Standing Facility (MSF) is the rate at which scheduled banks could borrow funds overnight from the Reserve Bank of India (RBI) against approved government securities.
RBI-Reserve Bank of IndiaBanks can borrow funds through MSF during acute cash shortage (considerable shortfall of liquidity). This measure has been introduced by RBI to regulate short-term asset liability mismatches more effectively.
The Marginal Standing Facility (MSF) is pegged 100bps or 1 % above the Repo Rate.
To provide greater liquidity cushion the Reserve Bank of India (RBI) introduced Marginal Standing Facility or MSF. RBI announced the introduction of MSF on May 3, 2011 and it was effected from May 9, 2011.
Reserve Bank of India, in it’s annual policy statement, has declared “The stance of monetary policy is, among other things, to manage liquidity to ensure that it remains broadly in balance, with neither a large surplus diluting monetary transmission nor a large deficit choking off fund flows.”
Marginal Standing Facility Rate: Under this scheme, Banks will be able to borrow upto 2% (wef 17/04/2012) of their respective Net Demand and Time Liabilities (NDTL).
Some Important Questions on Marginal Standing Facility (MSF):
1. What is the Present Marginal Standing Facility (MSF) Rate?
Answer: 9%
2. What is Marginal Standing Facility (MSF)?
Answer: Already explained above.
3. MSF is costlier than Repo Rate, then Why do banks borrow money from RBI using MSF?
Answer: Yes, MSF is 1% costlier than the Repo Rate. But usually banks borrow money from RBI during acute cash shortage.
Explanation of Bank Related Rates
1) What is Bank Rate?
Bank rate is the rate of interest which RBI charges on the loans and advances that it extends to banks and other financial intermediaries. Changes in the bank rate are often used by central banks to control the money supply.
2) What is Repo Rate?
The rate at which the RBI lends money to commercial banks is called repo rate, a short term for repurchase agreement. A reduction in the repo rate will help banks to get money at a cheaper rate. When the repo rate increases borrowing from RBI becomes more expensive.
3) What is Reverse Repo Rate?
The rate at which banks park their money with Reserve Bank is called the reverse repo rate.
4) What is Marginal Standing Facility (MSF) Rate?
The Marginal Standing Facility (MSF) Scheme is operational on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo) i.e. commercial banks can borrow money from RBI. The basic difference between Repo and MSF scheme is that in MSF banks can use the securities under SLR to get loans from RBI and hence MSF rate is 1% more than repo rate. Read more about MSF here
5) What is CRR?
Cash reserve ratio is the cash parked by the banks in their specified current account maintained with RBI.
6) What is SLR?
Statutory liquidity ratio is in the form of cash (book value), gold (current market value) and balances in unencumbered approved securities.
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