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Difference Between Repo Rate and MSF Rate

IndianMoney.com Research Team | Updated On Thursday, April 25,2019, 03:04 PM

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Difference Between Repo Rate and MSF Rate

 

 

Definition of Repo Rate

Repo rate is the rate at which the central bank (RBI) of the country lends money to the commercial banks in the event of any shortfall of funds. Repo rate is an instrument of the monetary policy of India and is used by the central bank to control inflation. Some banks sell their securities to the RBI to borrow money. Repo stands for repurchase agreement, which is a contract in which banks provide eligible securities such as treasury bills to the RBI while availing overnight loans. An interest rate is levied on these kinds of Repo transactions as well.

Definition of MSF Rate

The Marginal Standing Facility is the rate at which RBI lends funds overnight to banks against government securities. The Marginal Standing Facility is a new liquidity adjustment facility window created by the Reserve Bank of India in 2011. The rate of interest on MSF is above 100 bps above the Repo rate. The banks can borrow up to 1% of their Net Demand and time liabilities from this facility. RBI has introduced the MSF facility to regulate short term asset liability in a more effective manner.

Key Differences Between Repo Rate and MSF Rate

  • Repo rate is the rate at which the commercial banks lend money from the central bank at times of shortfall of funds while MSF rate is the rate at which the scheduled commercial banks borrow funds overnight from the central bank.
  • Repo rate is the rate at which the commercial banks can borrow money from the RBI. So, this facility can be availed by all commercial banks. In case of MSF rate, only some specified scheduled commercial banks can avail this facility.
  • Repo rate is an instrument of the monetary policy that is used by the central bank to control inflation whereas MSF is used to maintain permanency in overnight lending rates.
  • Repo rate involves trading of bank’s securities as collateral to RBI under the repurchase agreement. Whereas MSFallows banks to use the securities that come under SLR (Statutory Liquidity Ratio) in the process of availing loans from RBI.
  • Reporate is effective since the 2005 and MSF rate was implemented in 2011.
  • Also, the Repo rate is much lower than the MSF.
  • Loans at Repo rate are generally granted to commercial banks by RBI while in case of MSF rate, it is at the discretion of RBI whether to grant the loan or not.

SEE ALSO: Impact Of Increasing Repo Rates

Similarities Between Repo Rate and MSF

  • Both the rates apply to commercial banks that help them to borrow funds from the central bank
  • In both cases,  the borrowing banks pledge their securities to the central bank to secure a loan
  • Both are lending rates of RBI and so both these rates are determined by the central bank.

SEE ALSO: Repo Rate vs Bank Rate

Comparison Chart Between Repo Rate and MSF

The Basis for Comparison

Repo  Rate

MSF Rate

Meaning

Repo rate refers to the discounting rate at which the central bank i.e., Reserve Bank of India lends money to the commercial banks against Repurchase Agreements of government securities.

MSF or Marginal Standing Facility Rate, is the rate at which the central bank i.e. Reserve Bank of India lends money overnight to scheduled commercial banks against approved government securities of statutory liquid ratio (SLR) quota up to a certain percentage of their net demand and time liabilities (NDTL)

Aim

Repo rate is a monetary tool used by the central banks for controlling inflation in the economy

MSF rate is mainly used to maintain permanency in overnight lending rates

Pledging of Security

 Pledging of government bonds are done, which is further repurchase by the banks

Pledging of securities of SLR quota which is in excess of the current SLR can be pledged.

Eligibility

All commercial banks are eligible to borrow money under Repo rate

All scheduled commercial banks having their current account and subsidiary general ledger with the central banks are eligible

Applicable Form

Repo rate is effective from since the year 2005

MSF rate was introduced in the year 2011

Rate

Repo rate is comparatively less. Currently, the repo rate is 6.25%.

The MSF is maintained at 25 bps higher than the repo rate.

Conclusion

From the above discussion, it is clear how banks use these two different tools for borrowing money from the central bank i.e. RBI. If banks want to borrow funds from RBI at a low rate of interest then they can borrow using Repo rate whereas in case of urgency, banks can borrow overnight funds from RBI can using MSF at a high rate of interest. 

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