What is Marginal Standing Facility?
The RBI established the marginal standing facility window in 2011-12 to provide emergency liquidity to banks when inter-bank liquidity is a shortfall. Banks can borrow overnight funds from the RBI by pledging government securities as collateral. The MSF rate is the interest rate charged by the RBI for this facility, and the MSF rate is higher than the repo rate. The MSF rate acts as a ceiling for the overnight inter-bank rate and helps to stabilize the money market.
Marginal Standing Facility Explained
MSF rate is the interest rate RBI charges on overnight loans to banks with a liquidity crunch. Banks can borrow money from RBI by pledging their government securities under MSF.
MSF is a short-term borrowing facility for banks that face cash shortages or liquidity mismatches. Banks can use MSF when they exhaust their borrowing limit under the repo rate, which is lower than the MSF rate.
RBI introduced MSF in 2011 to reduce inter-bank market volatility and improve monetary transmission. MSF rate is usually 25 basis points (0.25%) above the repo rate, but RBI can change it depending on the economic situation.
For example, in October 2017, RBI fixed the MSF rate at 6.25%, 25 bps more than the repo rate of 6%. However, in July 2013, RBI increased the MSF rate to 3% above the repo rate to curb the fall of the rupee.
Banks can borrow up to 1% of their net demand and time liabilities (NDTL) under MSF. NDTL is the difference between the deposits and borrowings of a bank and its loans and investments. RBI can also vary this limit at its discretion