Tenets of MSF or, the Marginal Standing Facility Rate

Tenets of MSF or, the Marginal Standing Facility Rate

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The Reserve Bank of India lends money to scheduled commercial banks that are severely short on liquidity at a rate known as the MSF rate, or Marginal Standing Facility rate. Banks can pay the exclusive MSF rate, which is different from the Repo rate, to the RBI to get overnight cash. The rate and proportion of borrowing under MSF can be changed by RBI to maintain economic stability in India. Banks could receive up to 1% of their net demand and time liabilities (NDTL), which are the sum of all of their deposits and liabilities related to borrowings from other banks, by paying this rate when MSF was first introduced in May 2011. The interest rate for MSF was 100 basis points higher than the repo rate.

However, in July 2013, the RBI increased the MSF rate to 300 basis points higher than the Repo rate to combat the declining value of the rupee. The central bank then lowered it to 50 basis points in another change, making it easier for banks to get funds from the RBI when they need quick cash. In accordance with the most recent change to RBI monetary policy, which was made on October 4, 2017, the MSF rate is set at 6.25 percent, which is 25 basis points higher than the current Repo rate. Since its inception, the MSF rate has undergone numerous adjustments by the RBI to maintain economic equilibrium in the nation.

RBI can lend money to the banks through MSF, or Marginal Standing Facility if they are totally exhausted of liquidity. By tendering their authorised government assets, this short-term borrowing arrangement enables the scheduled banks to obtain funds from the Indian central bank overnight in the event of a serious cash shortfall. Banks frequently experience liquidity problems as a result of the financial gap brought about by the misalignment between the deposit and lending portfolios. Such gaps don't linger for long, and banks can ask the RBI for rapid cash for a day within the confines of the Statutory Liquidity Ratio to handle such emergency situations (SLR).

Under its Monetary Policy for 2011–12, theReserve Bank of India implemented MSF. Nonetheless, it became active on May 9, 2011. Upon its introduction in June 2011, this facility was used by the banks to borrow Rs. 1 billion in its first year of operation. In order to improve the stability of the overnight lending rates between banks and to support appropriate financial transmission in the banking system, the most recent liquidity adjustment facility was created. It aided RBI in gaining better control over the flow of money into the Indian financial system.

How does MSF function? - Needing money, the commercial banks pledge to the RBI within the LAF, or liquidity adjustment facility, for lending liquidity at a greater rate as compared to the Repo rate. The MSF rate is typically 0.25 percent, or 25 basis points, higher than the repo rate. All of the scheduled banks under the RBI are able to use this facility to get funds for emergencies up to 1% of their NDTL (net demand and time liabilities) or SLR securities. Banks may only promise this unique capability in an emergency situation if the interbank liquidity has entirely frozen.