Economics • Banking & FinanceMedium
What does 'Marginal Standing Facility (MSF)' allow scheduled commercial banks to do in India?
A. Borrow overnight funds from the RBI exceeding their normal LAF limits by pledging government securities.✓ Correct Answer
B. Maintain foreign currency reserves without statutory deductions.
C. Issue long-term infrastructure bonds exempt from taxation.
D. Provide uncollateralized microfinance loans to self-help groups.
💡 Solution & Explanation
The Marginal Standing Facility acts as an emergency borrowing window that enables scheduled commercial banks to access overnight funds from the Reserve Bank of India when inter-bank liquidity dries up completely. Banks can pledge government securities from their Statutory Liquidity Ratio portfolio up to a specified percentage to avail funds at an interest rate higher than the standard repo rate. This mechanism helps member banks manage sudden cash shortages and prevents systemic contagion during tight monetary conditions. The MSF rate serves as the upper ceiling of the RBI liquidity adjustment corridor.
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