Marginal Standing Facility (MSF)16‌

MSF is a new scheme announced by the RBI in its Monetary Policy, 2011–12 which came into effect from May, 2011. Under this scheme, banks can borrow overnight upto 1 per cent of their net demand and time liabilities (NDTL) from the RBI, at the interest rate 1 per cent (100 basis points) higher than the current repo rate. In an attempt to strengthen rupee and checking its falling exchange rate, the RBI increased the gap between ‘repo’ and MSF to 3 per cent (late July 2013).

The MSF rate has been floated as a penal rate and since mid-2015 RBI has maintained it 1 per cent higher than the prevailing repo rate. By end March 2017 it was at 6.75 per cent, fully aligned with the Bank rate (i.e., equal to the Bank rate).

Other Tools

Other than the above-given instruments, RBI uses some other important , too to activate the right kind of the credit and monetary policy—

(i) Call Money Market: The call money market is an important segment of the money market where borrowing and lending of funds take place on over night basis. Participants in the call money market in India currently include scheduled commercial banks (SCBs)—excluding regional rural banks), cooperative banks (other than land development banks), insurance. Prudential limits, in respect of both outstanding borrowing and lending transactions in the call money market for each of these entities, are specified by the RBI.

In recent times, several changes have been introduced by the RBI in this market. By April 2016, banks were allowed to borrow only 1 per cent of their NDTL (net demand and time liabilities, i.e., total deposit of the banks, in layman term) under overnight facility at repo rate. For the rest of 0.75 per cent of their NDTL, they may use the term repos of different tenors. In a sense, since late 2013, RBI has been discouraging banks to use repo route and switch over to term repos for their requirements of the short-term funds. Promoting stability and signalling better cost of loans are the main objectives of this changed stance.

(ii) Open Market Operations (OMOs): OMOs are conducted by the RBI via the sale/purchase of government securities (G-Sec) to/from the market with the primary aim of modulating rupee liquidity conditions in the market. OMOs are an effective quantitative policy tool in the armoury of the RBI, but are constrained by the stock of government securities available with it at a point in time. Other than the institutions, now individuals will also be able to participate in this market (as per the Union Budget 2016–17).

(iii) Liquidity Adjustment Facility (LAF): The LAF is the key element in the monetary policy operating framework of the RBI (introduced in June 2000). On daily basis, the RBI stands ready to lend to or borrow money from the banking system, as per the need of the time, at fixed interest rates (repo and reverse repo rates). Together with moderating the fund- mismatches of the banks, LAF operations help the RBI to effectively transmit interest rate signals to the market. The recent changes regarding a cap on the repo borrowing and provision of the term repo have changed the very dynamics of this facility after 2013.

(iv) Market Stabilisation Scheme (MSS): This instrument for monetary management was introduced in 2004. Surplus liquidity of a more enduring nature arising from large capital inflows is absorbed through sale of short-dated government securities and treasury bills. The mobilised cash is held in a separate government account with the Reserve Bank. The instrument thus has features of both, SLR and CRR.