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. 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 7 August 2019, the Reserve Bank of India reduced the repo rate by 35 basis points to 5.40% from 5.75%. The reverse repo rate was also reduced to 5.15%. Subsequently, the MSF rate, as well as the bank rate, were also brought down to 5.65%. This is the central bank’s fourth rate cut in this year.