Understanding Marginal Standing Facility
The Marginal Standing Facility (MSF) is a tool by the Reserve Bank of India (RBI) introduced in 2011-12. It provides banks with emergency liquidity during inter-bank liquidity shortfalls. Banks borrow overnight funds from RBI, pledging government securities. The MSF rate, higher than the repo rate, is the interest rate for this facility. It aids in stabilizing the money market as an overnight inter-bank rate ceiling.
Details of Marginal Standing Facility
The MSF rate is the interest on overnight loans by RBI to banks facing a liquidity crunch. Banks pledge their government securities to borrow under MSF.
MSF serves as a short-term borrowing option for banks with liquidity mismatches or cash shortages. Banks use MSF when their borrowing limit under the repo rate is exhausted. The repo rate is lower than the MSF rate.
Introduced in 2011, MSF helps reduce inter-bank market volatility and improves monetary transmission. Usually, the MSF rate is 25 basis points (0.25%) above the repo rate, but this can vary with economic situations.
For instance, in October 2017, the MSF rate was fixed at 6.25%, 25 bps above the 6% repo rate. In July 2013, to curb rupee depreciation, the MSF rate was increased to 3% above the repo rate.
Under MSF, banks can borrow up to 1% of their net demand and time liabilities (NDTL). NDTL is the difference between a bank's deposits and borrowings and its loans and investments. RBI may change this limit as needed.