The RBI has several tools at its disposal for bringing its monetary policy into effect. Common ones are the repo rate and the reverse repo rate, but another key policy rate is the marginal standing facility rate. This is the rate at which banks can get immediate cash in urgent times through the Marginal Standing Facility (MSF) scheme. Alongside other RBI tools, this rate helps regulate the money supply in the economy. As a borrower, you should know that the MSF rate has a direct relationship with loan interest rates.
To know more about MSF and MSF rate, read on.
Marginal Standing Facility (MSF) is a provision made by the RBI through which scheduled commercial banks can obtain liquidity overnight, in the event that inter-bank liquidity completely dries up. This is a facility for emergencies, through which banks obtain liquidity support at the MSF rate, which is a rate higher than the repo rate.
Normally, banks pledge eligible securities above the SLR requirement to the RBI to obtain liquidity through loans at the repo rate. Now, if a bank exhausts this means, it can resort to the MSF provision to get quick money for a 1-day period by pledging, within the limits of SLR, government securities.
Banks can avail immediate cash of up to a percentage, now 3%, of their NDTL under MSF, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. What is MSF rate? It is a penal rate of interest at which the RBI offers banks funds under the Marginal standing facility. If a bank’s liquidity dries up due to, say, a loan-deposit mismatch, it could avail funds from the RBI at the marginal standing facility rate even if it does not have eligible securities beyond the SLR.
MSF is a short-term arrangement as banks generally do not run out of liquidity for a long time, but at a given point they may face a dire shortage of funds.
The current marginal standing facility rate in India is 4.25%. The MSF rate is closely linked to the repo rate and while, at one time, it was 1% or 100 basis points higher than the repo rate, now it lies just 0.25% above the repo rate. When the Monetary Policy Committee (MPC) slashed the repo rate from 4.40% to 4%, it brought the MSF rate down, accordingly, from 4.65% to 4.25%
To know the current MSF rate, you can always visit the RBI website and click on ‘Policy Rates’. The MSF rate will be clearly listed alongside other key rates such the repo rate and reverse repo rate.
The Marginal Standing Facility was introduced by the RBI in the 2011-2012 monetary policy and it helps both banks and the RBI in a handful of ways.
The quick arrangement of liquidity can be viewed as the main benefit of MSF and the other benefits are related to it.
The MSF rate is related to the rates at which borrowers get loans. Currently, the MSF rate is low and has reduced from its previously held value. This means that it is now easier for banks to borrow. Hence, individual and corporate borrowers should be able to avail cheaper loans. Conversely, if the MSF rate increases, borrowing will be more expensive for banks and so, individual and corporate borrowers will have to pay more for their loans.
However, the MSF rate is at times hiked to protect the rupee against further depreciation against the dollar. So, to your personal finances, an increase or decrease in the MSF could have an indirect and mixed effect. However, when it comes to the cost of loans, a low MSF rate, as is currently present, is beneficial.
For a while, banks could borrow up to 1% of their NDTL. Then it was increased to 2% and now, because of the pandemic, banks can avail up to 3% of their NDTL through the MSF scheme. At minimum, banks must ask the RBI for Rs.1 crore through MSF. Beyond that, they must apply for funding in multiples of Rs.1 crore. So, currently banks can request funding of Rs.1 crore, Rs.2 crore, Rs.3 crore, and so on, up to 3% of their NDTL. Later once the present-day relaxation is discontinued, banks may be able to avail only 2% of their NDTL.
One factor to remember here is that when a bank makes a request for funding, the RBI has the right to reject it, wholly or partially.
The MSF and the repo rate are both important monetary policy instruments and are linked to each other in the sense that the MSF rate is kept at a certain percentage higher than the repo rate. At one time this gap was 1% and so, if the repo rate was 7% the MSF rate would be 8%. Today, the gap is much narrower, just 0.25%
However, despite the correlation between the repo rate and the MSF rate there are differences to note between them.
With a better understanding on MSF and MSF rate, you can make more informed financial decisions.