Which of the given statements best describes the difference between the Repo Rate and the Marginal Standing Facility?

Solution

• Option B is the Correct answer: • The Repo Rate is the (fixed) interest rate at which the RBI provides overnight liquidity up to a certain limit (0.25% of their NDTL) to banks against the collateral of government and other approved securities under the Liquidity Adjustment Facility (LAF). Repo is short form of "Repurchase Agreement". • Marginal Standing Facility (MSF) is a facility introduced in 2011, under which scheduled commercial banks can borrow additional amount of overnight money (over and above what is available to them through repo rate) from the Reserve Bank by dipping into their SLR portfolio up to a limit at a penal rate of interest. This provides a safety valve against unanticipated liquidity shocks to the banking system. The main difference between the Repo rate loans and the loans availed under the Marginal Standing Facility: When banks take loans from RBI at Repo rate, banks need to keep Govt. Securities with RBI, but this security is in addition to the requirement of SLR. Banks cannot keep SLR securities to avail loan from RBI at Repo Rate. But under MSF, banks can borrow money/cash from RBI by dipping into the SLR reserve. This means the banks can keep 3% of the SLR securities with RBI (i.e. the SLR can go down up to 3% below the normal SLR limit) and can borrow cash from RBI. MSF Rate = Repo Rate + 0.25%