Economics • Banking & FinanceHard
Analyze the operational mechanics of the Marginal Standing Facility introduced by the Reserve Bank of India. What key feature distinguishes this borrowing window from the standard repo facility?
A. It permits scheduled commercial banks to borrow overnight funds by dipping into their statutory liquidity ratio portfolio up to a prescribed limit✓ Correct Answer
B. It requires banks to pledge foreign currency assets instead of domestic government securities
C. It provides long-term developmental credit to regional rural banks at zero interest rates
D. It mandates physical delivery of gold bullion to central bank vaults prior to fund disbursement
💡 Solution & Explanation
The Marginal Standing Facility allows scheduled banks to access emergency overnight liquidity from the central bank by pledging government securities even below their mandatory statutory liquidity ratio threshold up to permitted limits. Interest charged under this facility is typically higher than the normal repo rate, serving as a ceiling for overnight interbank rate movements. This mechanism acts as a safety valve during acute liquidity stress in the financial system.
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