Economics • Banking & FinanceHard
What is the primary operational mechanism of the 'Marginal Standing Facility' introduced by the Reserve Bank of India?
A. A window allowing scheduled commercial banks to borrow overnight emergency funds against excess statutory liquidity ratio securities at a penalty rate✓ Correct Answer
B. A permanent facility for purchasing long term corporate debentures from non banking financial companies
C. An automated clearing mechanism for settling high value inter bank foreign exchange transactions
D. A concessional refinancing scheme for export oriented manufacturing units in Special Economic Zones
💡 Solution & Explanation
Marginal Standing Facility allows scheduled commercial banks to dip into their statutory liquidity ratio portfolio up to a prescribed limit to borrow overnight funds from the RBI during severe liquidity crunches, typically priced higher than the repo rate. Repo facility operates under standard liquidity adjustment auctions with different collateral rules. This facility acts as a safety valve against unexpected liquidity shocks in the inter bank market. Introduced in 2011, it helped curb excessive volatility in overnight interest rates.
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