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Consider the following statements regarding the Marginal Standing Facility (MSF) of RBI: 

1. It is similar to the repo rate for the financial institutions.

2. It is on the lines of the liquidity adjustment facility and part of it.  

3. Though it is a costlier route to fulfill overnight requirement of funds, it is not a penal rate. 

4. Banks use this route once they exhaust all channels to raise short-term funds.

Which of the statements given above is/are not correct?

  • a)
    1, 3 and 4 only

  • b)
    1, 2 and 3 only

  • c)
    1, 2 and 4 only

  • d)
    1, 2, 3 and 4

Correct answer is option 'A'. Can you explain this answer?
Verified Answer
Consider the following statementsregarding the Marginal Standing Facil...
The correct answer is:


1. 1, 3 and 4 only


Explanation:




  • Statement 1 is not correct: The Marginal Standing Facility (MSF) is not exactly the same as the repo rate; it is an emergency borrowing rate for banks above the repo rate. The MSF allows banks to borrow funds overnight from the RBI against government securities.



  • Statement 2 is correct: The MSF is on the lines of the Liquidity Adjustment Facility (LAF) and is a part of it, designed to help banks manage overnight liquidity shortages.



  • Statement 3 is not correct: While the MSF is a costlier route compared to the repo rate, it is considered a penal rate since it is higher than the repo rate to discourage excessive reliance on it.



  • Statement 4 is not correct: Although banks typically use the MSF after exhausting other avenues for raising short-term funds, the nature of MSF being a penal rate and its higher cost is implied in the statement, making it misleading.




Therefore, statements 1, 3, and 4 are not correct.
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Most Upvoted Answer
Consider the following statementsregarding the Marginal Standing Facil...
Marginal Standing Facility (MSF) of RBI

Introduction: Marginal Standing Facility (MSF) was introduced by the Reserve Bank of India (RBI) in May 2011 to provide an additional window to banks to borrow funds from the central bank at a higher rate of interest.

Statements:

1. MSF is similar to the repo rate for the financial institutions.

- Correct statement: The MSF rate is higher than the repo rate, and it is the rate at which banks can borrow funds overnight from the RBI against the collateral of government securities.

2. MSF is on the lines of the liquidity adjustment facility and part of it.

- Correct statement: The MSF is a part of the liquidity adjustment facility (LAF), which is used by banks to adjust their daily liquidity mismatches.

3. Though it is a costlier route to fulfill overnight requirement of funds, it is not a penal rate.

- Correct statement: MSF is a costlier route to fulfill overnight requirements of funds as it is higher than the repo rate, but it is not considered a penal rate.

4. Banks use this route once they exhaust all channels to raise short-term funds.

- Incorrect statement: Banks can use the MSF route to borrow funds if they face a liquidity crunch and are unable to borrow from other sources, but it is not necessary that they exhaust all channels before resorting to MSF.

Conclusion: The correct answer is option 'A' as statement 1, 2, and 3 are correct, while statement 4 is incorrect.
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Community Answer
Consider the following statementsregarding the Marginal Standing Facil...
Shouldn't the correct answer be option c?
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Consider the following statementsregarding the Marginal Standing Facility (MSF)of RBI:1. It is similar to the repo rate for the financial institutions.2. It is on the lines of the liquidity adjustment facility and part of it.3. Though it is a costlier route to fulfill overnight requirement of funds, it is not a penal rate.4. Banks use this route once they exhaust all channels to raise short-term funds.Which of the statements given above is/are notcorrect?a)1, 3 and 4 onlyb)1, 2 and 3onlyc)1, 2 and 4 onlyd)1, 2, 3 and 4Correct answer is option 'A'. Can you explain this answer?
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