Tenets of MSF or, the Marginal Standing Facility

Tenets of MSF or, the Marginal Standing Facility

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In its Monetary Policy of 2011–12, the Reserve Bank of India introduced MSF, also known as the Marginal Standing Facility. It is referred to as a penal rate according to which the RBI lends money to the banks when exhausted of every borrowing succor. The Marginal Standing facility permits the banks to get money charged an interest rate that is more than the repo rate and can be termed as the Marginal standing facility rate. However, it went into effect on May 9, 2011. This facility was first offered in June 2011 for the first time, and banks borrowed Rs. 1 billion under this policy in its first year. This most recent liquidity adjustment facility was made in order to improve the banking system's financial transmission and stability by stabilizing overnight lending rates between banks. It helped the Reserve Bank of India (RBI) tighten its grip on India's money supply.

Under the Liquidity Adjustment Facility (LAF), commercial banks promise the RBI to provide funds at a higher rate than the repo rate when they are in desperate need of money. The repo rate is typically 25 basis points lower than the MSF rate, or 0.25 percent. Up to one percent of their NDTL (net demand and time liabilities) or SLR securities can be borrowed in an emergency using this facility, which is available to all scheduled banks under the RBI. When the inter-bank liquidity completely freezes, banks can only pledge this special facility in an emergency.

The Reserve Bank of India pays scheduled commercial banks with severe liquidity shortages money at theMSF rate, also known as the Marginal Standing Facility rate. Banks can obtain overnight funds from the RBI by paying the exclusive MSF rate, which is different from the repo rate. In order to maintain economic stability in India, the RBI is able to adjust both the borrowing rate and the percentage of borrowing under MSF.

Banks could receive up to 1% of their net demand and time liabilities (NDTL), which are their total deposits and liabilities related to borrowings from other banks, by paying the MSF interest rate, which was 100 basis points higher than the Repo rate when it was first introduced in May 2011. However, in order to manage the declining value of the rupee, the RBI raised the MSF rate to 300 basis points higher than the repo rate in July 2013. In a subsequent amendment, the central bank reduced that to 50 basis points, making it simpler for banks to obtain RBI funding whenever they required it. The MSF rate has been set at 6.25 percent, which is 25 basis points higher than the repo rate at the time of the most recent RBI monetary policy change on October 4, 2017. As a result, the MSF rate has changed several times since its introduction, as the RBI adjusts the rate of MSF to keep the country's economy in balance.