Marginal Standing Facility (MSF) Rate September 10 , 2012

Marginal standing facility (MSF) is an ultra short term borrowing scheme for scheduled commercial banks. It was introduced by RBI in May 2011. Often banks face liquidity shortfalls due to mismatch in deposit and advance amounts. These are usually very short term and banks can borrow from RBI for one day period by offering dated government securities. Up to 2% of banks' net demand and time liabilities (NDTL, which represents a bank's deposits and borrowings from others) can be borrowed under MSF. Marginal standing facility rate is usually 1% above repo rate. However both rate of borrowing and percent of borrowing allowed under MSF can be varied by RBI. In July 2013 RBI hiked MSF rate to 10.25%, ie 3% over repo rate, as part of its measures to combat rupee-dollar exchange rate volatility. Also banks were allowed to borrow only up to 0.5% of their NDTL. Hiking Marginal Standing Facility rate makes borrowing expensive for a bank which means loans become expensive for individual and corporate borrowers and this in turn translates to lesser availability of the rupee. RBI uses MSF and other measures to control money supply in the financial system. MSF rate hike is being done to stem excess availability of the rupee and hopefully control its depreciation with respect to the dollar whose availability is increasingly becoming rarer with the recent bulk FII outflows from stock markets spiked by developments in US economy. Technically MSF is different from repo borrowing (which comes under Liquidity Adjustment Facility or LAF) of RBI in that repo is meant to manage day-to-day liquidity while MSF is for overnight borrowing. MSF borrowing is more than expensive than repo because it is always a tad higher than repo rate. Also in MSF, banks can borrow against their securities in the Statutory Liquidity Ratio (SLR) holdings up to 2% of NDTL. For repo borrowing banks cannot pledge SLR securities. This means is that banks do not have to pay penal interest for SLR shortfall up to 2% if it is caused due to borrowing under MSF. MSF is meant only for Scheduled Commercial Banks unlike repo which can be availed by any entity.