What is MSF and MSF rate?
Marginal Standing Facility (MSF) is a provision made by the Reserve Bank of India through which scheduled commercial banks can obtain liquidity overnight, if 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 Statutory Liquidity Ratio requirement to the RBI to obtain liquidity through loans at the repo rate. Now, if a bank exhausts these, it can resort to the MSF provision to get quick money for 1 day by pledging, within the limits of SLR, government securities.
Banks can avail immediate cash of up to a percentage, meaning that they can dip into their SLR to obtain liquidity support from the RBI at the MSF rate. 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.