Repo Rate vs MSF 2021

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.

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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.
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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. Higher the MSF rate, 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.

As on 27 March 2020, the Reserve Bank of India reduced the repo rate by 75 basis points to 4.40% from 5.15%. On 16 April 2020, the reverse repo rate was reduced to 3.75% from 4.00%. Subsequently, the MSF rate, as well as the bank rate, were also brought down to 4.65%. This is one of the biggest rate cuts introduced by the central bank.

Repo Rate vs MSF Frequently Asked Questions

  1. Does the change in repo rate have any effect on the interest rate of my home loan or personal loan?

    2. 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.

  2. Is it mandatory for banks to reduce the interest rates on loans if the RBI reduces the repo rate?

    3. 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.

  3. Which is higher, repo rate or MSF?

    4. 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.

  4. What is the advantage to bank customers if the RBI reduces the MSF rate?

    5. 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.

  5. Where can I find the latest repo rates and MSF rates?

    6. 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.

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News About Repo Rate vs MSF

  • Mapusa Urban Bank will now accept utility payments but only in cash

    The Mapusa Urban Co-operative Bank of Goa (MUCB) has received approval from the Reserve Bank of India (RBI) to accept payments for water and electricity bills from its customers. However, the payments can only be made in cash as the robust restrictions on the bank by the RBI remain effective. The cash received by the bank will be deposited to another bank and the amount will then be transferred to the respective departments. The bank has also been permitted by the RBI to transfer around Rs.32 lakh paid by consumers for water and electricity bills in the previous month to the PWD and the electricity department.

    The RBI had previously put some restrictions on the transfer of money to the above-mentioned departments due to which the payments of the customers were pending. The curb on the bank to accept deposits or lend to customers was imposed when the RBI found the cash reserve ratio of the bank to be negative.

    25 September 2018

  • Bank books of 200 NPA accounts examined by RBI during annual inspection

    The Reserve Bank of India has examined 200 NPA accounts dating back to 2011 during its annual inspection of bank books. The RBI is looking into classificiations, debt and provisions restructuring, repayment history and a lot of other things to ensure that all of them have correctly followed the procedure. The Reserve Bank of India has asked for more details from banks to know more regarding the provision of some big stressed accounts. This move comes weeks before the August 27 deadline before which lenders will have to finalise debt resolutions for loans of more than Rs.2,000 crore. If the Reserve Bank of India finds any irregularities, the accounts will be referred to National Company Law Tribunal for bankruptcy resolution.

    17 August 2018

  • Registered sale agreement mandatory to seek interest on home delays

    A registered sale agreement is now a necessity for a home buyer if they wish to get interest for any delays made by the real estate developer. This is according to the Maharashtra Real Estate Regulatory Authority (MahaRERA). This ruling will be very significant to investors and home buyers who are still relying on the letter of allotment even though they pay a lot of money to the developer. They still do not enter into an agreement to delay the payment of goods and service tax, stamp duty and other such charges. This verdict was delivered after a complaint filed by two home buyers against a construction firm in Mumbai. The home buyers said that even after making a payment of a substantial amount, the developer did not deliver the possession to them on the date promised by the developer. They were hopeful that the respondent is directed to the register and an agreement for sale is executed so that they can receive interest for the delay in handing over of possession. The rate of interest to paid here will be 2% more than State Bank of India’s marginal cost of lending rate. This is significant rule to keep in mind for aspiring house owners as they are still relying mainly on the letter of allotment while not entering into a registered agreement.

    26 July 2018

  • RBI hikes repo rate after 4.5 years

    The monetary policy committee(MPC) of the Reserve Bank of India decided to increase the repo rate to 6.25% from the existing 6%. The MPC unanimously agreed to the decision after the increase in the international crude oil prices. This is the first price hike in more than 4 years, with the last hike taking place in January 2014. Many of the major lenders like ICICI Bank, State Bank of India, and Punjab National Bank have raised their lending rates as a result of this increase in the repo rate.

    7 June 2018

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