Economics • Banking & FinanceHard
What specific operational purpose does the 'Marginal Standing Facility' serve for scheduled commercial banks operating within the Indian monetary system?
A. It enables banks to borrow overnight funds from the central bank in excess of their normal statutory liquidity ratio limit by pledging government securities.✓ Correct Answer
B. It permits banks to extend long-term infrastructure loans without complying with priority sector lending guidelines.
C. It allows foreign banks to repatriate dividend earnings without paying withholding taxes to the central government.
D. It provides retail depositors with government-backed insurance coverage against bank failures.
💡 Solution & Explanation
The Marginal Standing Facility permits scheduled commercial banks to borrow overnight funds from the Reserve Bank of India up to a specified limit by pledging government securities, acting as a safety valve against severe liquidity shocks. The interest rate charged under this facility is kept higher than the repo rate to discourage casual borrowing. Banks are permitted to utilize a portion of their statutory liquidity ratio securities for this borrowing purpose.
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