Marginal Standing Facility

Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. The Marginal standing facility is a scheme launched by RBI while reforming the monetary policy in 2011-12.

It is a penal rate at which banks can borrow money from RBI when they are completely exhausted of all borrowing assistance. The Marginal Standing facility allows banks to borrow money with an interest rate above the repo rate and can be termed as the Marginal standing facility rate.

This article gives relevant details about  the topic marginal standing facility. This is an important part in the Economy subject under UPSC syllabus. Economy is an important part of the UPSC syllabus.  It is important to be aware of important UPSC terms and basic concepts, which are asked in the IAS exam directly or indirectly.

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MSF Description

  • Banks borrow from the RBI by pledging government securities at a rate greater than the repo rate under LAF (liquidity adjustment facility).
  • The MSF rate is pegged 100 basis points or a percentage point above the repo rate.
  • Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
  • The minimum amount for which RBI receives application is Rs.1 Crore, and afterwards in multiples of Rs.1 Crore.

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Difference between MSF and Repo Rate

  • The difference between the MSF and the repo rate is that MSF is used only in emergency situations.
  • The RBI does this to control interest rate volatility by allowing commercial banks to borrow against government securities at a higher rate than the prevailing repo rate (1 percentage point higher).
  • Another difference with the repo rate is that banks can pledge government securities from the SLR quota up to 1% under the MSF. Then, even if the SLR comes below 21.5%, banks need not pay any penalty under MSF.

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