Explore the purpose and functioning of the Marginal Standing Facility (MSF) used by RBI to manage short-term liquidity in India's banking system

Marginal Standing Facility (MSF)

• Introduction of MSF by RBI

  • The Reserve Bank of India (RBI) introduced the Marginal Standing Facility (MSF) in its Monetary Policy for the year 2011–12 to provide a new avenue for overnight borrowing.

  • Under the MSF scheme, banks are allowed to borrow overnight funds up to 1% of their Net Demand and Time Liabilities (NDTL) based on the outstanding amount at the end of the second preceding fortnight.

• Rate and Eligibility Criteria

  • The MSF rate is set at 100 basis points above the repo rate, which is the rate at which banks borrow funds from the RBI.

  • All scheduled commercial banks that maintain both a current account and Subsidiary General Ledger (SGL) account with the RBI are eligible to participate in the MSF facility.

  • The minimum borrowing amount under MSF is Rs. 10 million, and further requests must be made in multiples of Rs. 10 million.

• Operational Control and Purpose

  • The RBI retains the discretion to accept or reject, either fully or partially, any borrowing request submitted under the MSF scheme.

  • The Marginal Standing Facility helps the RBI in curbing volatility in overnight lending rates within the banking system and in maintaining liquidity discipline.