RBI slashes MSF rate to 9.50%

The Reserve Bank of India slashed the Marginal Standing Facility rate (MSF) by 75 basis points from 10. 25% to 9.50%.  The central bank also rolled back minimum daily maintenance of the Cash Reserve Ratio (CRR) from 99% to 95% keeping the CRR unchanged at 4%.
RBI has assured that it will reduce the difference between the MSF and repo rate to 100 basis points. RBI raised the repo rate by 25 basis points to 7.50%.

What is MSF?

Marginal Standing Facility (MSF) was introduced by the Reserve Bank of India in 2011-12 as part of its monetary policy. Under this facility, banks can borrow funds from RBI at 8.25%, which is, generally, 1% or 100 basis points above the Liquidity Adjustment Facility-repo rate against pledging government securities.
Banks can borrow funds through MSF when there is a considerable shortfall of liquidity. This measure was introduced by RBI to regulate short-term asset liability mismatches more effectively.

What is the difference between Liquidity Adjustment Facility-repo rate (LAF) and Marginal Standing Facility (MSF) rate?

Banks can borrow from the RBI under LAF-repo rate, which stands at 7.50%, by pledging government securities over and above the Statutory Liquidity Requirement of 24% (SLR). Banks cannot sell government securities to RBI that is part of its SLR quota while availing LAF on the other hand they can do so while availing MSF.
MSF is open to the banks that want to borrow from the RBI even if the credit is costlier by a percentage point or so. Through MSF banks can borrow funds up to 2% of their Net Demand and Time Liabilities (NDTL), at current 9.50%. However, it can be availed with securities above the SLR of 24% and even below.

Month: Current Affairs - September, 2013