Marginal Standing Facility (MSF) is a monetary policy tool that was introduced by the Reserve Bank of India (RBI) in 2011. It is an overnight lending facility that allows banks to borrow money from the RBI at a rate that is higher than the repo rate.
The repo rate is the rate at which banks can borrow money from the RBI by pledging government securities as collateral. The MSF was introduced as a supplement to the repo rate, as a way for banks to borrow funds at short notice, in case of a liquidity crunch or any other emergency situation.
Under the MSF, banks can borrow up to 2% of their net demand and time liabilities (NDTL) from the RBI, at a rate that is 1% higher than the repo rate. This means that if the repo rate is 4%, the MSF rate would be 5%. The borrowing limit under the MSF is calculated on a daily basis, based on the banks’ NDTL as of the previous fortnight.
The MSF is meant to provide a safety net for banks, in case they are unable to meet their liquidity requirements through other means. It is intended to be used only as a last resort, and banks are required to exhaust all other avenues of borrowing before resorting to the MSF.
The introduction of the MSF was a response to the liquidity crisis that occurred in 2011, when several banks were facing a shortage of funds. The RBI introduced the MSF to provide a more flexible option for banks to borrow funds, and to address the liquidity crunch.
However, the use of the MSF has been limited, and it has been used only sparingly by banks. This is because the MSF rate is higher than the repo rate, and borrowing at a higher rate can increase the cost of funds for banks. As a result, banks have been cautious in using the MSF, and have preferred to meet their liquidity requirements through other means.
In conclusion, the Marginal Standing Facility is a monetary policy tool that was introduced by the Reserve Bank of India to provide banks with a flexible option to borrow funds in case of a liquidity crunch. While it has been used sparingly by banks, it remains an important tool in the RBI’s monetary policy framework, and provides a safety net for banks in times of stress.
