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.
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.
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- 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.