3/23/2017 MarginalStandingFacilityArthapedia

MarginalStandingFacility
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MarginalStandingFacility(MSF)isanewschemeannouncedbytheReserveBankofIndia(RBI)inits
MonetaryPolicy(201112)andreferstothepenalrateatwhichbankscanborrowmoneyfromthecentralbank
overandabovewhatisavailabletothemthroughtheLAFwindow(http://arthapedia.in/index.php?
title=Liquidity_Adjustment_Facility_(LAF)).

MSF,beingapenalrate,isalwaysfixedabovethereporate.TheMSFwouldbethelastresortforbanksonce
theyexhaustallborrowingoptionsincludingtheliquidityadjustmentfacilitybypledginggovernment
securities,wheretheratesarelowerincomparisonwiththeMSF.TheMSFwouldbeapenalrateforbanksand
thebankscanborrowfundsbypledginggovernmentsecuritieswithinthelimitsofthestatutoryliquidityratio.
TheschemehasbeenintroducedbyRBIwiththemainaimofreducingvolatilityintheovernightlendingrates
intheinterbankmarketandtoenablesmoothmonetarytransmissioninthefinancialsystem.

MSFrepresentstheupperbandoftheinterestcorridorwithreporateatthemiddleandreverserepoasthe
lowerband.

Tobalancetheliquidity,RBIusesthesoleindependent"policyrate"whichisthereporate(intheLAF
window)andtheMSFrateautomaticallygetsadjustedtoafixedpercentabovethereporate(MSFwas
originallyintendedtobe1%abovethereporate).MSFisatpresentalignedwiththeBankrate.UnderSection
49oftheReserveBankofIndiaAct,1934,theBankRatehasbeendefinedasthestandardrateatwhichthe
ReserveBankispreparedtobuyorrediscountbillsofexchangeorothercommercialpapereligiblefor
purchaseundertheAct.OnintroductionofLiquidityAdjustmentFacility(LAF),discounting/rediscountingof
billsofexchangebytheReserveBankhasbeendiscontinued.Asaresult,theBankRatebecamedormantasan
instrumentofmonetarymanagement.ItisnowalignedtoMSFrateandisusedonlyforcalculatingpenaltyon
defaultinthemaintenanceofcashreserveratio(CRR)andthestatutoryliquidityratio(SLR).

AsannouncedintheSecondQuarterReviewoftheMonetaryPolicy201314onOctober29,2013
(https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8532&Mode=0),MarginalStandingFacility(MSF)is
availablebetween7.00pmand7.30pm(insteadofthehithertoexistingtimingsof4.45pmto5.15pm),
therebymakingitreallythelastresortofbanks.ThechangeintimingshavetakeneffectfromNovember5,
2013.

MSFcameintoeffectfrom9thMay2011.

MSFschemeisprovidedbyRBIbywhichthebankscanborrowovernightupto1percentoftheirnetdemand
andtimeliabilities(NDTL)i.e.1percentoftheaggregatedepositsandotherliabilitiesofthebanks.However,
witheffectfrom17thApril2012RBIraisedtheborrowinglimitundertheMSFfrom1percentto2percentof
theirNDTLoutstandingattheendofthesecondprecedingfortnight.Therateofinterestfortheamount
accessedthroughthisfacilitygotfixedat100basispoints(i.e.1percent)abovethereporateforallscheduled
commercialbanks.However,therateofinterestontheamountaccessedfromthisfacilitygotfixedat300basis
points(i.e.3%)abovethereporatewitheffectfrom15July2013.Inaddition,accesstotheLAFwindowwas
reducedbyRBItojust0.5%oftheirNDTLwhichinturnforcedbankstoaccesstheMSFwindowfortheir
requirements,asLAFwindowwasnotsufficientenough.InthecreditpolicyofSeptember2013,i.e.,afterone
month,thiswasreversed,wherebyMSFratewascutby75bpsfrom10.25%to9.5%andasonSeptember
2013MSFstoodat200bps(2%)abovethereporate,whichisconsideredasthe"policyrate"intheeconomy.

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3/23/2017 MarginalStandingFacilityArthapedia

However,theamountthatcanbeaccessedusingLAFwindowremainedat0.5%oftheNDTL.LaterMSFwas
broughtbacktotheoriginallyintendedlevelof1%abovethereporateandwasbeingautomaticallyadjustedas
andwhenreporatesarechanged.

InApril2016,RBIchangeditsmonetarypolicystancetofavouranarrowthepolicyratecorridorfrom+/100
basispoints(bps)to+/50bpsbyreducingtheMSFrateby75basispointsandincreasingthereversereporate
by25basispoints,withaviewtoensuringfineralignmentoftheweightedaveragecallrate(WACR)withthe
reporate.ThusMSFisnowplacedat0.5%abovetheRepoRate.Thenewreporateis6.5%,whileMSFisat
7%andReverseReporateisat6%.TheBankRatewhichisalignedtotheMSFratealsostandsadjustedto7%.

BankscanborrowthroughMSFonallworkingdaysexceptSaturdays,inMumbai,whereRBIhasits
headquarters.Inordertofacilitatebetterliquiditymanagementbythemarketparticipantsandtoalignthe
liquidityoperationswiththeworkingofpaymentsystems,ReserveBankofIndiahasdecidedtoconduct
ReverseRepoandMSFoperationsonallMumbaiholidayswhentheRTGSisopen.Thischangewillcome
intoeffectfromFebruary19,2016.ThetimingsoftheReverseRepo/MSFoperationswillbebetween5:30
pmand7:30pmonsuchholidays.

TheminimumamountwhichcanbeaccessedthroughMSFisRs.1croreandinmultiplesofRs.1crore.(Rs1
crore=Rs10million).Theapplicationforthefacilitycanbesubmittedelectronicallyalsobytheeligible
scheduledcommercialbanks.ThebanksusedthefacilityforthefirsttimeinJune2011andborrowedRs.1
billionviatheMSF.

TheECB(EuropeanCentralBank)alsooffersstandingfacilitiescalledmarginallendingfacilitiessimilartothe
MSFintroducedinIndia.TheFederalReservehasdiscountwindowsystemssimilartoStandingfacilities.Like
theMSF,thesecondarycreditfacilitymadeavailablebytheFederalReservetothedepositoryinstitutionsin
USAistypicallyovernightcreditonaveryshorttermbasisatratesabovetheprimarycreditrate.

Theeffectivenessofstandingfacilitiesinreducingvolatilityhavebeenexaminedbymanyscholarsandcertain
studieshavepointedoutthatintheFederalReserveSystemintheUnitedStates,thedesignofthefacility
decreasesabanksincentivetoparticipateactivelyininterbankmarketduetotheperceivedstigmafromusing
suchfacility.Thisinturnreducestheeffectivenessofstandingfacilityinreducinginterestratevolatility.

AlsoSee
StatutoryLiquidityRatio(SLR)(http://www.arthapedia.in/index.php?title=Statutory_Liquidity_Ratio)
cashreserveratio(CRR)(http://www.arthapedia.in/index.php?title=Cash_Reserve_Ratio_(CRR))
LiquidityAdjustmentFacility(LAF)(http://www.arthapedia.in/index.php?
title=Liquidity_Adjustment_Facility_(LAF))
BaseRate(http://arthapedia.in/index.php?title=Base_Rate)
MarketStabilizationScheme(MSS)(http://arthapedia.in/index.php?
title=Market_Stabilization_Scheme_(MSS))
PolicyRate(http://arthapedia.in/index.php?title=Policy_Rate)
BankRate(http://arthapedia.in/index.php?title=Bank_Rate)
InterestRateCorridor(http://arthapedia.in/index.php?title=Interest_rate_corridor)
RepoandReverseRepoRate(http://arthapedia.in/index.php?title=Repo_Rate_and_Reverse_Repo_Rate)

References
Furfine,Craig(2003)Standingfacilitiesandinterbankborrowing:EvidencefromtheFedsnewdiscount
window,WorkingPaper,FederalReserveBankofChicago.

1.http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6394&Mode=0
2.http://www.ecb.int/mopo/implement/sf/html/index.en.html

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3.http://www.federalreserve.gov/monetarypolicy/discountrate.htm
4.http://www.chicagofed.org/digital_assets/publications/working_papers/2004/wp2004_01.pdf

Contributedby
NikhilaMenon,IES(2004)(http://www.ies.gov.in/myaccountprofileview.php?memid=315)
[email protected](mailto:[email protected])

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