Reserve Bank of India (RBI): What is the difference between Repo rate and Marginal Standing Facility?

Marginal standing facility is a window for banks to borrow from Reserve Bank of India in emergency situation when inter-bank liquidity dries up completely. Banks borrow from the central bank by pledging government securities at a rate higher than the repo rate under liquidity adjustment facility or LAF in short Repo rate is considered as the policy rate as repo is the widely used instrument between banks and RBI. Earlier bank rate was considered as the benchmark but it has lost its relevance as banks seldom take refinance from RBI at bank rate. Any change in repo rate signals RBI's interest rate stance. Source: http://articles.economictimes.indiatimes.com/2013-09-20/news/42252485_1_repo-rate-bank-rate-policy-rate

REPO RATE:- Bank can borrow money from Reserve Bank of India under the repo rate. This borrowing is not free. Banks have to pledge their holding of government bonds as collateral and in turn borrow from the Reserve Bank of India. MSF:- There is another dimension to the monetary policy which has become effective since July of 2011 which is the marginal standing facility rate. When banks dont have excess collateral which is basically the government bonds to borrow from the Reserve Bank of India, as one knows banks have to maintain ex-percent of their deposits as collateral in government securities, this is called the statutory liquidity ratio. If they have excess government bonds over and above the SLR which is currently around 22 percent then they can borrow from the Reserve Bank of India under the repo window. But in case some banks dont have excess SLR securities they can still draw down on their holding of SLR securities and borrow from the Reserve Bank of India at the marginal standing facility rate ( repo rate +1%).

There are two kinds of system which state how PSBs (Public Sector Banks) and other such entities can take short-term loan from RBI (Reserve Bank Of India) : LAF (Liquidity Adjustment Facility): Operating since: 2000 Minimum credit limit: Rs. 5 crore. Users: Banks, NBFCs (Non-banking financial companies), DBs(Development banks) and government. In short, all the clients of RBI. Rate of Interest: Repo rate. Collateral used: All the government securities excluding SLR(Statutory liquidity reserves) securities. Maximum Credit Limit: None MSF (Marginal Standing Facility): Operating since: 2011 Minimum credit limit: Rs.1 crore Users:  Only Scheduled Commercial banks. Rate of Interest: Repo rate + 1% Collateral used: all the government securities including SLR. Maximum credit limit: 2% of NDTL.

Repo rate are rates at which commercial bank takes loan from rbi against the securities kept with RBI and marginal standing facility was released in May 2011. The main purpose was to eliminate the volatality of the overnight money market. The rates are usually 1% higher than repo. Eg. U took Rs 10/ - loan from bank and still you fall short so you ask for Rs 2 more, now bank allowed Rs 10 @ 10% and Rs 2 @ 11% thats the difference between REPO and msf.

Repo rate: Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Repo rate is used by monetary authorities to control inflation. Marginal Standing Facility: being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging through government securities, which has lower rate of interest in comparison with the MSF.

All banks have to maintain a SLR(Stipulated Liquidity Ratio i.e. the amount of cash for the deposits that have been made in the bank  by account holders,etc),to meet this SLR requirement banks borrow money.The RBI provides 2 methods for this money to be borrowed from RBI- 1)LAF(Liquidity Adjustment Facility i.e. Repo Rate and Reverse Repo Rate) and 2)MSF(Marginal Standing Facility). Now,the repo rate is for borrowing money under normal circumstances,by normal circumstances it means that the bank has enough securities to pledge to get the loan amount from RBI.That is it can only pledge the securities that are not a part of the banks SLR quota. whereas for the money obtained from MSF it can be obtained by even pledging these securities.MSF thus has higher rate of interest and is valid for only short periods of time.And there is also a limit on the total short-fall for which MSF money can be obtained(2% of NDTL) Marginal Facility was introduced to reduce the cost to finance the gap in SLR for short-term basis.Other source to finance this gap was inter-bank finance ,since the interest rate in this method was shooting up,MSF was introduced. Refer to this link--> http://ask.indianmoney.com/m0/1700-what-is-the-difference-between-between-msf-and-laf/AnswerInDetail.html

The Marginal Standing Facility (MSF) Scheme is operational on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo) i.e. commercial banks can borrow money from RBI. The basic difference between Repo and MSF scheme is that in MSF banks can use the securities under SLR to get loans from RBI and hence MSF rate is 1% more than repo rate. Under the facility, the eligible entities can avail overnight, up to one per cent of their respective Net Demand and Time Liabilities (NDTL) outstanding at the end of the second preceding fortnight. But for the intervening holidays, the MSF facility will be for one day except on Fridays when the facility will be for three days or more, maturing on the following working day. In the event, the banks’ SLR holdings fall below the statutory requirement up to one per cent of their NDTL, banks will not have the obligation to seek a specific waiver for default in SLR compliance arising out of use of this facility in terms of notification issued under sub section (2A) of Section 24 of the Banking Regulation Act, 1949.

Repo rate :  The discount rate at which a central bank repurchases government  securities from the commercial banks, depending on the level of money supply  it decides to maintain in the country's monetary system. To temporarily expand the money supply, the central bank decreases repo rates (so that bank can swap their holdings  of government securities for cash). Marginal standing facilities : It is a window for banks to borrow from the Reserve Bank of India in an emergency situation when inter-bank liquidity dries up completely. Banks can borrow money from the central bank over and above what is available to them through the LAF window.

The Marginal Standing Facility (MSF) Scheme is operational on the lines of the existing Liquidity Adjustment Facility – Repo Scheme (LAF – Repo) i.e. commercial banks can borrow money from RBI. The basic difference between Repo and MSF scheme is that in MSF banks can use the securities under SLR to get loans from RBI and hence MSF rate is 1% more than repo rate.