What is the difference between repo rate and marginal standing facility?

The key difference between the repo rate and the marginal standing facility (MSF) lies in their purpose and the type of banks that can access them: Aspect Repo Rate Marginal Standing Facility (MSF) Purpose Routine liquidity management for banks. Emergency or unforeseen liquidity needs for banks. Usage Regular short-term borrowing. Reserved for urgent situations as a source of last resort. Interest Rate Generally lower. Higher than the repo rate, reflecting its emergency nature.

What is Marginal Standing Facility: Understand MSF Rates in Banking

MSF stands for Marginal Standing Facility. It 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.

MSF Rate

The current MSF rate or Marginal Standing Facility Rate in India is 4.25%. This is the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.

Current Marginal Standing Facility (MSF) Rate

As of August 2024, the current Marginal Standing Facility (MSF) rate set by the Reserve Bank of India (RBI) stands at 6.75%. The MSF rate is typically 25 basis points (bps) higher than the repo rate, which remains at 6.50%. The MSF allows banks to borrow overnight funds from the RBI in times of liquidity shortages.

Here are 5 frequently used terms in relation with MSF, each explained as follows:

NTDL – Net Time and Demand Liabilities

NTDL or NDTL is actually a combination of two liabilities viz. Time and Deposit, that a bank/ NBFC holds towards its customers. While Demand liabilities include all those liabilities which are payable on demand, Time Liabilities are those liabilities which are to be paid on completion of prescribed period.

SLR - Statutory Liquidity Ratio

SLR is the term that refers to the reserved liquid assets that the commercial banks in India need to maintain in the form of government approved securities or gold assets with liquid cash before offering loans to the borrowers. The SLR of a bank is determined by calculating the ratio of total demand and time liabilities.

Repo Rate

It is the Rate of Interest at which RBI lends money to commercial banks and lenders. In times of inflation, RBI increases Repo Rate to make funds expensive and restrict buying behavior and contrarily, when it wants to provide money at a cheaper rate, it decreases the repo rate.

Reverse Repo Rate

When banks and lenders have surplus funds with them, they can lend money to the central bank as well. This rate is pre-decided by the RBI which is called the Reverse Repo Rate.

Bank Rate

This is the rate at which RBI offers long-term loan to the banks and NBFCs, unlike Repo Rate which is applicable over short term loans.

How does MSF work for RBI

In special cases when commercial lending institutes and banks exhaust their eligible security holdings owing to a sudden rise in borrowing demand, they request RBI to provide them with funds overnight.
These funds are lent at a higher rate(usually by 25bps) by RBI compared to the Repo Rate under the Liquidity Adjustment Facility.
Using this facility, all the scheduled banks under RBI can avail money in emergency situations up to 1% of their NDTL or SLR securities.
Under MSF, banks can borrow funds from the RBI by pledging government securities within the limits of the SLR.
This special facility can only be pledged by banks under emergency situations.

Objectives of Marginal Standing Facility (MSF)

The objective of the Marginal Standing Facility is to manage short-term liquidity fluctuations in the banking system while ensuring stability and effective transmission of monetary policy. By setting the MSF rate higher than the repo rate, the central bank encourages banks to manage their liquidity efficiently and rely on the MSF only when necessary, discouraging excessive borrowing and promoting responsible liquidity management.

Here are some key features of the Marginal Standing Facility:

1. Interest rate: The MSF rate is typically set at a higher rate than the repo rate. The repo rate is the rate at which banks borrow funds from the central bank against government securities. The MSF rate serves as a penal rate, creating a disincentive for banks to access this facility regularly.

2. Liquidity provision: The MSF provides an additional avenue for banks to meet their short-term liquidity requirements. Banks can borrow funds from the central bank under the MSF against eligible securities, including government securities and other approved instruments.

3. Overnight borrowing: The funds borrowed under the MSF are provided on an overnight basis, which means banks have to repay the borrowed amount along with the applicable interest rate within one working day.

4. Emergency funding: The MSF acts as a last resort for banks to meet their liquidity needs in case they are unable to obtain funds from other sources. It is primarily intended to address situations where banks are faced with a temporary liquidity crunch.

5. SLR marginal relief: Under normal circumstances, banks are required to maintain a certain percentage of their net demand and time liabilities (NDTL) in the form of liquid assets, known as the statutory liquidity ratio (SLR). The MSF allows banks to borrow funds up to a certain percentage of their SLR investments, providing them with additional flexibility.

MSF Rate vs Repo Rate – Key differences

Repo rate is applied on loans that meet the banks’ regular short-term financial needs while MSF is applied on loans that are required overnight due to sudden shortage of funds.
Repo rate applies to commercial banks whereas MSF is applied to scheduled banks.
In case of repo rate, Banks may have to provide their own securities as collateral to the RBI along with a repurchase agreement. For MSF, banks have to provide government securities as collateral.

Key difference between bank rate and MSF rate

Criteria	Bank Rate	MSF Rate
Purpose	Lends money to banks for long-term purposes, supporting capital investment and meeting statutory reserve requirements.	Short-term borrowing facility for banks to address sudden and temporary liquidity needs.
Duration of loan	Loans are typically for an extended period, often ranging from 90 days to one year or more.	Specifically designed for short-term funds, usually for overnight borrowing.
Applicability	Used by banks for various purposes, including meeting liquidity requirements and long-term capital needs.	Utilised by banks to address immediate and temporary liquidity mismatches.
Rate differential	Generally lower than the MSF Rate. Reflects a more accommodative stance for providing long-term funds.	Generally higher than the Bank Rate. Considered a penal rate, serving as a disincentive for frequent usage.
Collateral requirement	Involves the pledge of assets as collateral, and the interest rate is determined based on the collateral provided.	Banks can avail funds by providing eligible securities as collateral, reflecting the emergency nature of borrowing.

Bajaj Finserv – Key Financial Terms & Concepts

1	APF – All You Need to Know
2	Cash Reserve Ratio (CRR)
3	Repo Rate
4	Reverse Repo Rate
5	Statutory Liquidity Ratio (SLR)
6	What is BPS?
7	What is Repo Rate Transmission?

MSF FAQ

The criteria for borrowing through the Marginal Standing Facility (MSF) include being a scheduled commercial bank, facing unexpected liquidity needs, willingness to pay the MSF rate (higher than the repo rate), providing eligible collateral, adhering to percentage limits on borrowing, keeping the borrowing duration short-term, and complying with RBI regulations.

Yes, an increase in the Marginal Standing Facility (MSF) rate can affect borrowers by leading to higher borrowing costs, resulting in increased interest rates on loans, potentially impacting economic activity and investment decisions.

The key difference between the repo rate and the marginal standing facility (MSF) lies in their purpose and the type of banks that can access them:

Aspect	Repo Rate	Marginal Standing Facility (MSF)
Purpose	Routine liquidity management for banks.	Emergency or unforeseen liquidity needs for banks.
Usage	Regular short-term borrowing.	Reserved for urgent situations as a source of last resort.
Interest Rate	Generally lower.	Higher than the repo rate, reflecting its emergency nature.

It can so happen that a commercial bank can be faced with a mismatch between its deposit and loan portfolio, thereby creating a financial gap. This, in turn, may result in a temporary cash crunch. In order to enable banks to borrow money overnight from the central bank and to have more control over the supply of money into the economy, the MSF was introduced by the RBI.

MSF was introduced in India by the RBI in its monetary policy of 2011-12 with effect from 9 May 2011. During the very first year of its introduction, the combined borrowings of various banks under this policy stood at Rs 1 billion.

The Marginal Standing Facility (MSF) helps stabilise the economy by providing emergency liquidity to banks, thereby reducing volatility in short-term interest rates. During liquidity shortages, MSF prevents banks from defaulting and maintains confidence in the financial system, indirectly influencing economic stability and growth.

As of August 2024, the Reserve Bank of India (RBI) has set the Marginal Standing Facility (MSF) rate at 6.75%. The MSF rate is typically 25 basis points higher than the repo rate, serving as the upper bound of the interest rate corridor.

Yes, changes in the MSF rate can influence inflation. An increase in the MSF rate makes borrowing costlier for banks, reducing money supply and demand, thereby controlling inflation. Conversely, lowering the MSF rate can stimulate lending and spending, which might push inflation upward.

Banks prefer using the MSF during a liquidity crisis because it offers an immediate source of funds, even though it comes at a higher interest rate. MSF is accessible when banks cannot meet their liquidity needs through regular repo transactions, making it a reliable last-resort borrowing option.

MSF, or Marginal Standing Facility, is a window provided by the Reserve Bank of India (RBI) for banks to borrow overnight funds at a higher interest rate than the repo rate. It helps banks maintain liquidity and meet their short-term funding requirements in times of financial stress.

The full form of MSF in banking is Marginal Standing Facility. This facility allows banks to borrow funds overnight from the Reserve Bank of India at a higher interest rate, providing them with a safety net to manage their liquidity needs effectively during periods of cash shortages.

The primary difference between MSF and repo rate lies in their purpose and usage. The repo rate is the rate at which banks borrow from the RBI for short-term needs, while the MSF is used by banks to borrow overnight funds during financial distress at a higher rate.

Show More Show Less