Question

    Which of the given statements best describes the

    difference between the Repo Rate and the Marginal Standing Facility?
    A Repo rate operations are carried out in primary market whereas the operations related to the Marginal standing facility are carried out in the secondary markets Correct Answer Incorrect Answer
    B SLR securities (Statutory Liquidity Ratio) cannot be used for availing loans at the repo rate while they can be used for availing loans under the Marginal Standing Facility Correct Answer Incorrect Answer
    C Repo rate loans are overnight loans while the loans under the Marginal standing facility are available for 14 days Correct Answer Incorrect Answer
    D Repo rate facility can be increased above its limit under exceptional circumstances, marginal standing facility cannot be increased above its prescribed limit Correct Answer Incorrect Answer

    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%

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