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Consider the following statements about the Marginal Standing Facility.
1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.
2. Its interest rate is 1 basis points higher than the current repo rate
Which of these statements is/are correct?
- a)1 Only
- b)2 Only
- c)Both 1 and 2
- d)Neither 1 nor 2
Correct answer is option 'A'. Can you explain this answer?
Most Upvoted Answer
Consider the following statements about the Marginal Standing Facility...
MSF is a new scheme announced by the RBI in its Monetary Policy, 2011-12 which came into effect from May 2011.
Under this scheme, banks can borrow overnight up to 1 percent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 per cent (100 basis points) higher than the current repo rate.
In an attempt to strengthen the rupee and check its falling exchange rate, the RBI increased the gap between ‘repo' and MSF to 3 per cent (late July 2013).
Community Answer
Consider the following statements about the Marginal Standing Facility...
Marginal Standing Facility (MSF) - Explanation
Marginal Standing Facility (MSF) is a window provided by the Reserve Bank of India (RBI) to the banks for borrowing funds overnight against the collateral of government securities in situations when the liquidity is dried up.
MSF was introduced by the RBI in May 2011 to deal with the liquidity crisis arising due to the Eurozone crisis.
MSF Rate
The interest rate at which banks can borrow funds through MSF is termed as MSF rate. It is always set higher than the repo rate.
Repo rate is the rate at which banks can borrow funds from the RBI by selling their securities to the central bank.
The difference between the MSF rate and the repo rate is known as the MSF Spread.
Current MSF Rate
As of 2021, the current MSF rate is 4.25%. This means that if a bank needs funds for overnight borrowing and has exhausted its borrowing limit under the Liquidity Adjustment Facility (LAF), it can borrow funds at the MSF rate of 4.25%.
Relation between MSF Rate and Repo Rate
The MSF rate and the repo rate are interlinked. The MSF rate is always 1% higher than the repo rate. This means that if the repo rate is 3.75%, the MSF rate would be 4.75%.
Conclusion
From the above explanation, we can conclude that only statement 1 is correct. The MSF rate is the rate at which banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up. The second statement is incorrect as the MSF rate is always set 1% higher than the current repo rate, not 1 basis point.
Marginal Standing Facility (MSF) is a window provided by the Reserve Bank of India (RBI) to the banks for borrowing funds overnight against the collateral of government securities in situations when the liquidity is dried up.
MSF was introduced by the RBI in May 2011 to deal with the liquidity crisis arising due to the Eurozone crisis.
MSF Rate
The interest rate at which banks can borrow funds through MSF is termed as MSF rate. It is always set higher than the repo rate.
Repo rate is the rate at which banks can borrow funds from the RBI by selling their securities to the central bank.
The difference between the MSF rate and the repo rate is known as the MSF Spread.
Current MSF Rate
As of 2021, the current MSF rate is 4.25%. This means that if a bank needs funds for overnight borrowing and has exhausted its borrowing limit under the Liquidity Adjustment Facility (LAF), it can borrow funds at the MSF rate of 4.25%.
Relation between MSF Rate and Repo Rate
The MSF rate and the repo rate are interlinked. The MSF rate is always 1% higher than the repo rate. This means that if the repo rate is 3.75%, the MSF rate would be 4.75%.
Conclusion
From the above explanation, we can conclude that only statement 1 is correct. The MSF rate is the rate at which banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up. The second statement is incorrect as the MSF rate is always set 1% higher than the current repo rate, not 1 basis point.
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Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?.
Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? for UPSC 2025 is part of UPSC preparation. The Question and answers have been prepared according to the UPSC exam syllabus. Information about Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer? covers all topics & solutions for UPSC 2025 Exam. Find important definitions, questions, meanings, examples, exercises and tests below for Consider the following statements about the Marginal Standing Facility.1. Marginal Standing Facility (MSF) rate refers to the rate at which the banks can pledge government securities for gaining liquidity in situations when the liquidity is dried up.2. Its interest rate is 1 basis points higher than the current repo rateWhich of these statements is/are correct?a)1 Onlyb)2 Onlyc)Both 1 and 2d)Neither 1 nor 2Correct answer is option 'A'. Can you explain this answer?.
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