Comparing Bank Rate, MSF and Repo Rate

Comparing Bank Rate, MSF and Repo Rate

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The following are the fundamental distinctions between the RBI's repo rate and the MSF rate: The repo rate differs slightly from the MSF rate:

• The rate at which RBI gives cash to the business banks when they are in transient monetary need is called Repo rate. On the other hand, the MSF rate is the rate at which the RBI lends overnight to banks when there is a severe lack of inter-bank liquidity.

• When the RBI lends money to commercial banks, the repo rate is used, while the MSF rate is used when the RBI gives money to eligible scheduled banks.

• The repo rate is used when banks borrow money from the RBI by selling additional securities and signing a repurchase agreement. However, when banks borrow money from the RBI against surplus government-approved securities, the MSF rates are applied.

• Under MSF, banks can borrow money by using securities with a Statutory Liquidity Ratio (SLR), which is prohibited under the repo rate.

• The MSF rate is 0.25 percent higher than the repo rate because it only applies to overnight loans when there is a significant lack of liquidity.

Key Differences Between the Bank Rate and the MSF Rate

Although you might think that the Bank Rate and the MSF Rate are the same, they are in fact distinct rates that play different roles in the country's borrowing and lending system. The primary differences are:

• The MSF rate is the rate at which scheduled commercial banks can obtain funds overnight in the event of an acute emergency by selling their government securities that fall under the Statutory Liquidity Ratio (SLR), whereas the Bank rate is the interest rate at which commercial banks in India can obtain loans from the RBI when they are in need of funds.

• All commercial banks and other financial institutions can get loans from the Reserve Bank of India whenever they need them under the bank rate. However, MSF rate is just pertinent for the Booked Business Banks who have current records and Auxiliary General Record or SGL with RBI.

• The RBI introduced the MSF rate in 201i, whereas the bank rate has existed since 1900. For a very long time, banks borrowed money from the central Indian bank at this very basic rate.

• The most important difference between the two is that the RBI does not require any security when lending money at the Bank Rate; however, when funds are borrowed through MSF, banks are required to pledge government-approved securities to the RBI.

• Obtaining funds overnight at the MSF rate is the last option for commercial banks, while borrowing at the bank rate is not. The banks must borrow money at the MSF rate once they have exhausted the repo limit.