Difference between Repo Rate and MSF
What is Repo Rate?
Repo rate is the rate at which the Reserve Bank of India lends money to commercial banks in order to meet their short term liquidity needs. Some banks sell their securities to RBI to borrow money, followed by a repurchase agreement. The repurchase agreement states that the bank will repurchase the securities from RBI at a later date at a price decided in advance.
What is MSF (Marginal Standing Facility Rate)?
MSF or Marginal Standing Facility 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:
- Repo rate is applied to loans given to banks who are applying to meet their short-term financial needs. While, 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 MSF and repo rate is that as MSF banks are allowed to use the securities that come under SLR (Statutory Liquidity Ratio) in the process of availing loans from RBI. And therefore, MSF is 1% more than repo rate.
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 100 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 money supply in the country’s financial system.
The repo rate is recently increased by the Reserve Bank of India by 0.25% on 1 August 2018 in its third bi-monthly monetary policy statement as a measure to control the increasing inflation in the Indian economic system. This prime RBI lending rate was previously increased on 6 June 2018 by 25 basis points from 6.00% to 6.25% in the second bi-monthly monetary policy statement for 2018-19. Due to this recent hike, the marginal standing facility rate (MSF) is also increased from 6.50% to 6.75%.