Economics • Banking & FinanceHard
What structural role does the 'Marginal Standing Facility' (MSF) play for scheduled commercial banks within the Reserve Bank of India monetary framework?
A. Allowing banks to borrow overnight funds beyond their normal liquidity adjustment facility quota by dipping into their statutory liquidity ratio portfolio✓ Correct Answer
B. Providing long-term capital subventions for setting up automated clearing houses in rural districts
C. Permitting foreign institutional investors to repatriate dividend earnings without central bank clearance
D. Enabling non-banking financial companies to issue commercial paper without credit rating prerequisites
💡 Solution & Explanation
Marginal standing facility is a window created in 2011 allowing scheduled commercial banks to borrow overnight emergency funds from the central bank up to a specified percentage of their net demand and time liabilities by pledging government securities, even if it dips into their statutory liquidity ratio requirement. The interest rate on marginal standing facility is kept higher than the repo rate, serving as a penal rate during acute liquidity squeezes. It helps mitigate extreme volatility in overnight interbank call money rates. Commercial banks can access this facility at the end of business days.
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