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September 24, 2013

What is Margional Standing Facility

What is MSF?

MSF is a relatively new instrument. RBI first announced about MSF in the annual policy review for the financial year 2011-12; the concept came into existence on 9 May 2011.

Under the facility, all scheduled commercial banks can borrow overnight from the central bank up to 1% if their net demand and time liabilities. The facility is available for banks on all working days, except Saturdays. The interest rate was fixed at 100 bps above the repo rate. Repo rate is the rate at which scheduled commercial banks borrow from RBI for the short term.

Under MSF, banks can request for a minimum of Rs.1 crore and thereafter in multiples of Rs.1 crore. In order to avail funds from MSF facilities, banks have to fulfil the margin requirement of 5% in case they are borrowing against the government of India dated securities and 10% in case they wish to borrow against state development loans. Therefore, to make a request for, say, Rs.100, banks have to furnish Rs.105 worth of government of India bonds or Rs.110 worth of state development loans.

Why is MSF useful?

The facility was introduced in order to contain volatility in the inter-bank overnight market. With MSF, RBI created a 200 bps corridor in policy rates with repo rate in the middle and MSF at 100 bps above the repo rate and reverse repo at 100 bps lower than the repo rate.

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