When inter-bank liquidity is completely depleted, banks can borrow from the Reserve Bank of India through the Marginal Standing Facility (MSF).
This facility allows banks to borrow money at an interest rate higher than the repo rate and can be used to bridge the gap between the central bank's repo rate and other banks' borrowing rates.
The Reserve Bank Of India introduced Marginal Standing Facility(MSF) to aid banks in achieving liquidity overnight. This facility proves beneficial when all the liquidities in the bank are dried up.
RBI put forth MSF to help banks during financial emergencies and control the flow of money in the country.
MSF was introduced in the year 2011-2012. It allows banks to borrow money from the central bank by pledging government securities at a higher rate than repo rates.
In times of dire need, commercial banks can request RBI provide cash at a higher rate than the Repo rate under LAF or Liquidity Adjustment Facility. Currently, the MSF rate is 6.65%.
The facility allows all scheduled banks regulated by the RBI to borrow money in an emergency up to one percent of their NDTL (net demand and time liabilities). Banks can only pledge this special facility in an emergency when interbank liquidity is completely frozen.
A Marginal Standing Facility rate is an interest rate at which the Reserve Bank of India lends money to scheduled commercial banks facing acute liquidity shortages. T
he MSF rate differs from the repo rate and by agreeing to the MSF rate, banks can get funds from the RBI overnight. To keep the Indian economy stable, the RBI can change the rate of borrowing and the percentage of borrowing under MSF whenever necessary.
As per RBI monetary policy, the current marginal standing facility(MSF) rate stands at 6.65%. This means that commercial banks can borrow money from RBI by pledging their government securities at an interest rate of 6.65% p.a when they are no longer eligible to borrow under the current repo rate, which is 6.50%.
The RBI helps banks in dire financial situations through Marginal Standing Facility. Banks borrow from RBI using msf rate to stay afloat when there is a severe liquidity shortage.
Following its introduction, the MSF rate has undergone several changes as the RBI reduces or increases the MSF rate to maintain a balance in the country's economic condition.
The RBI reduces the MSF rate so that banks can borrow more funds, which will increase the rupee's accessibility in the financial market. When banks have enough funds, they can extend large loans to businesses and corporations, which will help to strengthen the Indian economy.
When the MSF rate is high, loans from banks will be expensive. This will result in high-cost loans for the borrowers.
Only scheduled banks under RBI are eligible to borrow under MSF.
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