Economics • Banking & FinanceHard
Analyze the structural framework of the Marginal Standing Facility introduced by the Reserve Bank of India. What distinguishes this facility from the standard repo window?
A. It permits scheduled banks to borrow overnight funds exceeding their statutory liquidity ratio limits up to a specified percentage by pledging government securities✓ Correct Answer
B. It allows non-banking financial companies to access long-term venture capital funds directly
C. It provides zero-interest loans exclusively for export-oriented manufacturing units
D. It mandates foreign banks to maintain surplus reserves in foreign currency accounts
💡 Solution & Explanation
The Marginal Standing Facility serves as a penal borrowing window where scheduled commercial banks can access overnight emergency liquidity from the Reserve Bank of India by dipping into their statutory liquidity ratio portfolio up to a permitted percentage of net demand and time liabilities. The interest rate charged under this facility is kept higher than the standard repo rate, acting as a ceiling for overnight interbank interest rate movements. This mechanism helps banks manage unexpected liquidity shocks at the end of business cycles. It was introduced in 2011 to reduce volatility in the overnight money market.
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