Wednesday 14 September 2011

Marginal Standing Facility Scheme

The Reserve Bank of India (RBI) has introduced a new Marginal Standing Facility (MSF) scheme, which was announced to be implemented in its Monetary Policy for the year 2011-12. Under the new facility, banks will borrow overnight up to 1 per cent of net demand and time liabilities (NDTL) outstanding at the end of the second preceding fortnight. The MSF will be 100 basis points above the repo rate – the rate at which banks borrow from RBI. It needs to be noted that the repo rate has now become the only independent variable policy rate, marking a shift from earlier method of calibrating various policy rates separately. The reverse repo rate — the rate at which RBI borrows – will be kept 100 basis points lower than the repo rate. All scheduled commercial banks that have current account and subsidiary general ledger (SGL) account with RBI are eligible to participate in the MSF scheme.
RBI will receive requests for a minimum amount of Rs 10 million and in multiples of Rs 10 million thereafter. The central bank has the right to accept or reject partially or fully, the request for funds under this facility.
Marginal Standing Facility will curb inter-bank lending volatility:
The Reserve Bank of India’s new Marginal Standing Facility is expected to curb volatility in the overnight lending rates in the banking system. The banks will use Marginal Standing Facility to borrow overnight money only when they have exhausted all other existing channels like collateralized borrowing and lending obligation (CBLO) and liquidity adjustment facility (LAF). Difference between Liquidity Adjustment Facility-Repo Rate and Marginal
Standing Facility Rate:
 Banks can borrow from the RBI under LAF-Repo Rate, which stands at 7.25 per cent by pledging government securities over and above the statutory liquidity requirement of 24 per cent. Though in case of borrowing from the marginal standing facility, banks can borrow funds up to one per cent of their net demand and time liabilities at 8.25 per cent. However, it can be within the statutory liquidity ratio of 24 per cent.

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