Economics • Banking & FinanceHard
Analyze the operational mechanics of the Marginal Standing Facility (MSF) introduced by the Reserve Bank of India. How does MSF differ from the standard Liquidity Adjustment Facility repo window?
A. MSF allows scheduled commercial banks to borrow overnight funds in excess of their statutory liquidity ratio portfolio limits using government securities up to a prescribed percentage✓ Correct Answer
B. MSF provides long-term developmental loans exclusively to regional rural banks at zero interest
C. MSF is a penalty-free window managed by commercial banks for interbank lending without central bank oversight
D. MSF is restricted to foreign institutional investors seeking short-term arbitrage opportunities in equity markets
💡 Solution & Explanation
The Marginal Standing Facility permits scheduled commercial banks to dip into their statutory liquidity ratio holdings to borrow overnight funds from the Reserve Bank of India during severe liquidity squeezes. The interest rate on MSF is kept higher than the normal repo rate, acting as a penal rate that discourages habitual reliance. Government securities utilized under this facility can be pledged over and above the mandatory statutory liquidity ratio threshold. This mechanism acts as a safety valve against sudden interbank rate volatility.
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