What is MSF rate?
MSF or Marginal Standing Facility is a system of the Reserve Bank of India that allows scheduled commercial banks to avail funds overnight. The interest rate charged by RBI on such borrowings is called the MSF rate or marginal standing facility rate. RBI has introduced this provision to help scheduled banks when inter-bank liquidity completely dries up and they are in urgent need of money. MSF is sanctioned against government securities and the MSF rate is around 100 basis points or one percent higher than the repo rate. These loans fall under RBI’s liquidity adjustment facility or LAF. The maximum amount that can be availed under MSF is a percentage of the bank’s NDTL or net demand and time liabilities. Banks can use their SLR or statutory liquidity ratio to take loans under MSF. This is a short-term loan used to maintain the liquidity of banks. MSF helps in reducing the volatility of overnight lending rates and helps banks manage situations where there is a short-term asset liability mismatch. RBI uses this monetary policy to regulate the supply of funds into scheduled banks and also ensures safety for the depositors. Though limited, but the MSF rate at which banks borrow money from RBI can also affect retail loans. Generally, loans rates available for the public tend to get cheaper when MSF rate decreases and vice versa. Moreover, RBI also revises the MSF rate to strengthen the value of rupee, when required. Monetary standing facility was introduced by the RBI as a provision for banks to avail overnight funds during a revision of the country’s monetary policy in 2011-12.