MARGINAL STANDING FACILITY (Syllabus: GS Paper 3 – Economy)

News-CRUX-10     22nd November 2023        

Context: Recently, there has been a sharp increase in banks' borrowing from the Reserve Bank of India's (RBI) Marginal Standing Facility (MSF) in November, as indicated by the latest data from the RBI.

  • This rise reflects the current tight liquidity situation in the banking system.

Marginal Standing Facility (MSF)

  • About: Marginal standing facility (MSF) is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely.
  • Introduced by: The RBI in its credit policy of May 2011.
  • Purpose: Provides emergency liquidity support to banks facing sudden and unforeseen liquidity crunches, ensuring stability in the financial system.
  • The current MSF rate in India: 6.75%.
  • Emergency Window: MSF serves as a channel for scheduled banks to obtain overnight loans from the RBI during emergency situations when interbank liquidity is entirely depleted.

Banks' Borrowing Mechanism

  • Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short. 
  • The MSF rate is pegged 100 basis points or a percentage point above the repo rate. 
  • Under MSF, banks can borrow funds up to one percentage of their net demand and time liabilities (NDTL).
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