What is Repo Rate?
The repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in order to help these lenders meet their short-term liquidity needs. Some banks sell their securities to the RBI to borrow money, followed by a repurchase agreement. The repurchase agreement states that the bank will repurchase the securities from the Reserve Bank of India at a later date at a price decided in advance.
What is the Marginal Standing Facility Rate (MSF)?
The MSF or Marginal Standing Facility (MSF) Rate is the rate at which RBI lends funds overnight to scheduled banks, against government securities. RBI has introduced this borrowing scheme to regulate short-term asset liability mismatch in a more effective manner.
Key Differences between Repo Rate and MSF
Both repo rate and MSF are rates at which RBI lends money to various other banks. However, there are some differences between the two, they are:
- The repo rate is applied to loans given to banks that are looking to meet their short-term financial needs. While, the MSF is meant for lending overnight to banks.
- Repo rate is the rate at which money is lent by RBI to commercial banks, while MSF is a rate at which RBI lends money to scheduled banks.
- Lending at repo rates involve selling of bank’s securities as collateral to RBI along with a repurchase agreement. Loans given at MSF rates involve providing government securities as collateral.
- Another major difference between the MSF and repo rate is that as MSF banks are allowed to use the securities that come under Statutory Liquidity Ratio (SLR) in the process of availing loans from RBI.
Effect of Repo Rate:
Higher the repo rate, higher is the value of the short-term money. If the repo rate is low, banks are required to pay lower interest amount towards loans. This impacts the loans taken by customers, who can also avail loans at lower interest rates.
Effect of MSF Rate:
The MSF is maintained at 25 bps higher than the repo rate. MSF basically provides a greater liquidity cushion. The higher the MSF rate, the more expensive is borrowing for banks, as well as corporate borrowers and individuals. It is used by RBI to control the money supply in the country’s financial system.
On 30 September 2022, the RBI increased the repo rate by 50 basis points, from 5.40% previously to stand at 5.90% currently. The Marginal Standing Facility (MSF) Rate was also increased from 5.65% to 6.15%.
On 8 August 2022, the RBI increased the repo rate by 50 basis points, from 4.90% previously to stand at 5.40% currently. The reverse repo rate decreased from 3.75% to 3.35%. The Marginal Standing Facility (MSF) Rate as well as the bank rate also increased from 5.15% to 5.65%.
FAQs on Repo Rate vs MSF
- Does the change in repo rate have any effect on the interest rate of my home loan or personal loan?
- Is it mandatory for banks to reduce the interest rates on loans if the RBI reduces the repo rate?
- Which is higher, repo rate or MSF?
- What is the advantage to bank customers if the RBI reduces the MSF rate?
- Where can I find the latest repo rates and MSF rates?
Yes, any increase or decrease in the repo rate will increase or decrease the interest rates of retail loans if the banks also change their lending rates to reflect the change in the repo rate.
The Reserve Bank of India (RBI) has issued guidelines that state that banks must pass on the repo rate cuts to customers in the form of cuts in interest rates on their loans.
Usually, it is the MSF which is always higher than the repo rate. The MSF is usually about 100 basis points higher than the repo rate.
When the MSF is reduced, banks are lent funds overnight by the Reserve Bank of India (RBI). This translates to banks having more funds to provide to businesses and more rupees circulating in the economy which in turn strengthens it.
You can find updates on the latest repo rates and MSF rates on the official website of the Reserve Bank of India (RBI), on BankBazaar, and other news agency sites as well as the print media.
