Marginal Standing Facility: Definition, Benefits, MSF Full Form and Bank Rate| UPSC

By Aarna Tiwari|Updated : October 14th, 2022

Marginal Standing Facility or MSF is the rate at which banks borrow money from the RBI overnight in exchange for authorised government securities. This funding window, established in 2011, aids lenders in preventing emergencies and maintaining cash flow. However, the MSF rate is higher than the repo rate. This is relevant in emergency scenarios, such as when interbank liquidity completely disappears, and the overnight interbank rate becomes volatile.

The topic of Marginal Standing Facility or MSF is important for the UPSC Exam and is covered under the Economy section of the UPSC Syllabus. The article covers all relevant aspects of the Marginal Standing Facility, such as its meaning, full form, MSF Bank Rate, etc.

Table of Content

Marginal Standing Facility: Definition

The rate at which banks can borrow money from the RBI overnight is known as the Marginal Standing Facility. One of the key guidelines established by the Reserve Bank of India allows some commercial banks to obtain liquidity overnight. This works out to be helpful when all liquids have dried up. Banks employ MSF as an emergency option to get liquidity at the MSF rate. To assist banks in dire circumstances and to aid the RBI in maintaining the flow of money through the economy, the Reserve Bank of India (RBI) launched the marginal standing facility (MSF) in the fiscal years 2011–2012.

A bank can only obtain a maximum credit amount of 3% of its total deposits under MSF (NDTL). Since it is an emergency, the banks can employ the securities covered by the SLR quota without being penalised. By doing this, the banks will be protected from overnight interbank interest rate volatility.

>> MSF UPSC [PDF]

MSF Full Form

MSF stands for Marginal Standing Facility. The concerned banks borrow money from the central bank using the Marginal Standing Facility (MSF), which is accomplished by pledging government securities at a rate higher than the repo rate. This will make it easier for banks to get quick cash within a day.

MSF Rate

In India, the current MSF Rate, also known as the Marginal Standing Facility Rate, is 5.65%. This is the rate at which banks can use government securities as collateral to get liquidity in tight liquidity situations.

The MSF in August 2022 was 5.65%, often higher than the repo rate. This is because the Monetary Policy Committee (MPC) decided to raise the policy Repo rate under the Liquidity Adjustment Facility (LAF) by 50 basis points from 4.90 to 5.40 per cent with immediate effect as part of the Monetary Policy Statement.

Benefits of Marginal Standing Facility

The Marginal Standing Facility has various advantages, including:

  • a reduction in overnight lending rate volatility, 
  • the prevention of short-term liquidity gaps,
  • increased control over the economy's cash flow by the RBI,
  • assistance for banks in times of crisis.

Difference Between MSF and Repo Rate

The RBI uses the spread between lending and borrowing rate to describe the distinction between MSF and Reverse Repo Rates. The spread was 200 basis points for a considerable amount of time, with MSF being 100 basis points higher than the repo rate. The spread is only 90 basis points in December 2021 due to a modification in this convention.

Marginal Standing Facility

Repo Rate

The MSF is designed for lending to banks overnight.

Loans given to banks to satisfy their short-term financial needs are subject to the repo rate.

The rate at which the RBI extends loans to scheduled banks is the MSF rate.

The rate at which the RBI loans money to commercial banks is the repo rate.

Government securities must be provided as security for loans at MSF rates.

Selling bank securities to the RBI as collateral and engaging in a repurchase agreement is required for lending at repo rates.

MSF UPSC 

The topic of Marginal Standing Facility or the MSF is extremely important for the upcoming UPSC 2023. The topic is covered under the economy section of the UPSC Syllabus, and one must refer to the Indian Economy Notes for UPSC to prepare the topic in depth.

MSF UPSC Questions

Question: Consider the following statements regarding Marginal Standing Facility (MSF)?
1. This is a liquidity support arrangement for banks who do not have eligible securities above the SLR limit
2. The banks can borrow overnight funds (for one day only) from RBI
3. The banks can avail up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight
4. The interest rate on MSF is Repo Rate + 0.25%
Select the correct answer from the following options:

  1. Only 1 and 3
  2. 1, 2 and 3
  3. 1, 3 and 4
  4. All are correct

Answer: Option D

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Marginal Standing Facility FAQs

  • The rate at which banks can borrow money from the RBI overnight is known as the Marginal Standing Facility. This funding window, established in 2011, aids lenders in preventing emergencies and maintaining cash flow.

  • The MSF Full Form in banking is Marginal Standing Facility. A bank can only obtain a maximum credit amount of 3% of its total deposits under MSF (NDTL). 

  • In India, the current MSF Rate, also known as the Marginal Standing Facility Rate, is 5.65%. The MSF in August 2022 was 5.65%, often higher than the repo rate.

  • The interest rate at which commercial banks borrow money from the central bank without selling any securities is known as the "bank rate." The MSF Rate, on the other hand, is the interest rate at which commercial banks borrow money from the central bank overnight to provide government security.

  • One percentage point, or 100 basis points, more than the repo rate, is where the MSF rate is set. Banks can borrow up to one percentage point of their net demand and time liabilities under MSF (NDTL). 

  • The topic of Marginal Standing Facility or MSF is important for UPSC Prelims and UPSC Mains. Download the MSF UPSC Notes from UPSC Prelims and UPSC Mains. Download the MSF UPSC Notes from here

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