Economics • Banking & FinanceMedium
What characterizes the operation of the 'Marginal Standing Facility (MSF)' introduced by the Reserve Bank of India?
A. It allows scheduled commercial banks to borrow overnight funds exceeding their normal liquidity adjustment facility limits by pledging government securities up to a stipulated statutory liquidity ratio limit.✓ Correct Answer
B. It provides long-term developmental capital to state cooperative banks at concessional interest rates.
C. It enables retail investors to purchase treasury bills directly through digital portals.
D. It mandates foreign institutional investors to park a portion of their portfolio funds in zero-coupon bonds.
💡 Solution & Explanation
The Marginal Standing Facility is a window through which scheduled commercial banks can borrow overnight funds from the Reserve Bank of India in emergency situations by pledging government securities up to a designated percentage of their statutory liquidity ratio portfolio. The interest rate charged under MSF is typically higher than the repo rate, acting as a penalty rate during acute cash shortages. This mechanism helps contain excessive volatility in overnight interbank interest rates.
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