Demystifying Marginal Standing Facility in Financial Transactions

The Reserve Bank of India (RBI) is the central bank of the country and among the many important functions it performs, one is ensuring the stability of the Indian banking system. Marginal Standing Facility allows scheduled banks to borrow money from the Reserve Bank of India for a short term when interbank liquidity completely dries up. When a bank is running out of funds, it can borrow funds from the RBI by dipping into the Liquidity Adjustment Facility.

In this case, the maximum amount that a bank or lender can borrow cannot exceed 1% of the borrowing entity’s NDTL or Net Demand and Time Liabilities. The Reserve Bank of India releases money against government-approved collateral, such as cash, gold, etc. The Marginal Standing Facility Rate is always higher than the Bank Rate or the Repo Rate, which is the rate of interest that scheduled banks and lenders pay when they borrow money for the long term.

When the Reserve Bank of India first introduced the Marginal Standing Facility, the MSF Rate was 100 bps higher than the Repo Rate. However, the Reserve Bank of India introduced the concept of Marginal Standing Facility or MSF in 20122–12 and in its first year of implementation, scheduled banks and lenders borrowed more than Rs.1 Billion from the RBI at the MSF Rate. Therefore, in 2013, the RBI increased the MSF Rate to 300 bps higher than the Repo Rate.

However, as of today, the MSF Rate is only 25 bps higher than the Repo Rate. The current MSF Rate is 6.75% whereas the current Repo Rate is 6.50%. The Reserve Bank of India changes the MSF Rate in response to how the economy of the country is growing.

Marginal Standing Facility is an important monetary policy tool for the Reserve Bank of India and the central bank of the country uses this policy tool to effectively achieve the following purposes:

1. Through the Marginal Standing Facility, the RBI ensures the stability of the Indian banking system and its smooth working.
2. The Marginal Standing Facility also allows the central bank of the country to make sure that all banks and commercial lenders are invested in government-approved securities at all times.
3. The RBI also uses the Marginal Standing Facility to keep inflation under check. When inflation exceeds an acceptable level, the RBI increases the MSF Rate.
4. Banks and commercial lenders have to pay a high rate of interest to the RBI to borrow money, which in turn, leads to banks and lenders charging a higher rate of interest from their customers.
5. When the RBI increases the Repo Rate, people borrow less money, which in turn, leads to reduced flow of money within the economy. This is how the MSF helps RBI bring inflation under control.
6. The RBI also uses the MSF to push economic growth. When the growth of the economy slows down, the RBI decreases the Repo Rate. This makes loans cheaper and therefore, people borrow more and also spend more, which in turn, helps bring the growth of the economy back on track.

In conclusion, the Marginal Standing Facility is a very effective tool in RBI’s armour, one that it uses promptly and effectively. Borrowers must keep themselves informed about any changes in the MSF Rate as these changes have a direct impact on borrowers.