All you Need to Know About Marginal Standing Facility

The marginal standing facility (MSF) is a monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity in the banking system. In this post, we will discuss everything you need to know about the marginal standing facility:

What is Marginal Standing Facility?

The marginal standing facility is a window that allows scheduled commercial banks to borrow money overnight from the Reserve Bank of India. This facility was introduced in May 2011 by the RBI to provide a liquidity adjustment facility to banks in case of unforeseen circumstances.

Under the marginal standing facility, banks can borrow money from the RBI at a rate higher than the repo rate. The repo rate is the rate at which banks borrow money from the RBI for a short period. The marginal standing facility rate is usually slightly higher than the repo rate for instance the difference is 25 basis points or 0.25% in 2023.

How does Marginal Standing Facility Work?

The Marginal Standing Facility is a tool used by the RBI to manage liquidity in the banking system. When banks face a shortage of funds, they can borrow money from the RBI under this facility. The borrowing limit under the marginal standing facility is limited to 1% of the bank’s net demand and time liabilities (NDTL).

To avail of this facility, banks need to provide eligible securities as collateral to the RBI. These securities can be government securities, state development loans, and treasury bills. The value of the collateral should be higher than the amount borrowed by the bank.

The RBI provides funds to the banks under the marginal standing facility for a maximum of one day. Banks can repay the borrowed amount to the RBI at any time during the day. However, if the bank fails to repay the borrowed amount on the same day, the RBI can sell the collateral provided by the bank to recover the money.

Why was Marginal Standing Facility Introduced?

The marginal standing facility was introduced by the RBI to provide a liquidity adjustment facility to banks in case of unforeseen circumstances. Before the introduction of this facility, banks could borrow money from the RBI only through the repo rate window. However, there were limitations on the amount that banks could borrow under this window.

The marginal standing facility was introduced to provide an additional window for banks to borrow money from the RBI. This facility allows banks to borrow money at a higher rate than the repo rate, which acts as a deterrent for banks to borrow money from this window frequently.

Benefits of Marginal Standing Facility

The marginal standing facility has several benefits for the banking system. These include:

Providing an additional source of liquidity to banks

The marginal standing facility provides an additional source of liquidity to banks in case of unforeseen circumstances. This facility allows banks to borrow money from the RBI at a higher rate than the repo rate, which acts as a deterrent for banks to borrow money from this window frequently.

Managing liquidity in the banking system

The Marginal Standing Facility is a tool used by the RBI to manage liquidity in the banking system. By providing funds to banks under this facility, the RBI can ensure that there is sufficient liquidity in the banking system.

Encouraging banks to maintain adequate liquidity

The Marginal Standing Facility rate is usually 0.25%-1% higher than the repo rate. This acts as a deterrent for banks to borrow money from this window frequently. This encourages banks to maintain adequate liquidity and manage their funds efficiently.

The Marginal Standing Facility is an important monetary policy used by the RBI to manage liquidity in the banking system. This tool allows banks to borrow money from the RBI at a higher rate than the repo rate in case of unforeseen circumstances. While the MSF rate is usually higher than the repo rate, it can have an impact on the economy and market dynamics. Therefore, it is essential to have a clear understanding of the MSF guidelines and benefits. By staying informed about the MSF, banks and individuals can make informed decisions and plan their finances better.