Marginal Standing Facility (MSF)

The Marginal Standing Facility (MSF) is a facility under the Liquidity Adjustment Facility (LAF) through which banks can borrow funds at a penal rate of interest from the RBI on an overnight basis by dipping into their Statutory Liquidity Ratio (SLR) portfolio up to a predefined limit (2 per cent of NDTL). It acts as a safety valve against unexpected liquidity shortages in the banking system.

Background

The MSF was introduced by the RBI from the fortnight beginning 7 May 2011.

How MSF Works

Unexpected Liquidity Shortage → Bank Borrows Overnight from RBI → SLR Securities Used → RBI Injects Liquidity

Key Features

• Overnight Borrowing: Funds under MSF are available on an overnight basis.
• SLR Securities: Banks can borrow by dipping into their SLR portfolio up to a predefined limit of 2% of their Net Demand and Time Liabilities (NDTL).
• MSF Rate: The MSF rate is placed 25 basis points above the policy repo rate.
• Upper Bound of LAF Corridor: The MSF rate forms the upper bound or ceiling of the LAF corridor, while the SDF rate forms the floor and the policy repo rate lies in the middle.
• Availability: The MSF is available on all days of the week, throughout the year.
• Purpose: It provides banks with a source of funds when they face unanticipated liquidity shortages.

Repo vs MSF

• Under normal repo operations, banks obtain liquidity from the RBI against eligible securities available over and above the securities required to meet their SLR requirement. In other words, banks ordinarily cannot dip into the securities maintained for meeting the prescribed SLR requirement for normal repo borrowing.
• Under the Marginal Standing Facility (MSF), however, eligible banks are permitted to dip into their SLR securities and use these securities to obtain overnight liquidity from the RBI.