RBI’s Marginal Standing facility — Basics and Some history

RBI’s Marginal Standing facility or MSF became a point of attention thanks to RBI’s policy measures in Jul-13 to shore the Rupee (15-Jul-13 and 23-Jul-13). RBI basically did not touch the main policy rate – Repo and hiked MSF rate by 200 bps to 10.25%. Traditionally, MSF has been higher than Repo by 100 bps and the difference then was 300 bps. Then again on 20-Sep-13, it lowered the MSF rate by 75 bps to 9.5% making it 200 bps above Repo (as Repo was hiked to 7.5%).

I have been following some reports and articles on MSF basics, changes and so on. But not much clarity. So decided to try and make things a little simpler:

  • MSF was brought in under the new operating framework adopted by RBI in May-11 policy. Earlier we just had Rev repo and Repo as main rates. Post May-11, Repo became the main rate and rev Repo was automatically made 100 bps lower than Repo and MSF 100 bps higher.
  • Earlier, RBI tried to keep the main money market rates under its LAf corridor of Rev Repo and repo. This now shifted to REv Repo and MSF as corridors with Repo rate in the corridor. Adding on, the idea was to keep Repo rate around the uncollateralised call rate in the market.
  • Now, banks are free to borrow as much as they want under Repo provided they mantain the SLR. Moreover, MSF  rate was higher than Repo. So why the need for MSF? Well, there are following reasons:
    • There are always possibilities that certain entities do not get funds under Repo.
    • Repo window is open in the morning from 9.30 to 10.30 AM and rev Repo and MSF is open in the evening from 4:45 to 5:15 AM. So in case someone does not get funds from RBI/markets can get it from MSF window.
    • Though RBI also opens its Second LAF repo window in the evening when liquidity tightens (Fortnight closing of banks etc), but that is for selected days.
  • MSF is kept higher following the rules of Bagehot where the idea is to lend funds to a solvent institution provided it provides collateral and that too at a higher rate. So, RBI wants to encourage banks to borrow from markets/RBI Repo and hence opens MSF to only those that still need funds.
  • It is an additional window of funds but has certain stigma attached to it. Markets always try and guess who takes MSF (as it is anonymous) and looks for reasons for issues with that player etc. So the idea is to avoid MSF and keep it a top secret. We saw a simialr thing in US crisis as well when there were few takers of discount window (Fed’s MSF) for the same reasons.
  • However, because of RBI measures in Jul-13, Banks had no choice but to take MSF for liquidity. As taking MSF became a collective issue, there were no guessing games..

Terms of MSF:

RBI has changed the terms of borrowing for MSF over the years. I have just made a table for the same:

Date Rate Terms of Borrowing
3-May-13 MSF introduced Repo +100 Banks can borrow till 1% of their NDTL
21-Dec-11 Repo +100 1) Banks can borrow against excess SLR 2) Below SLR: 1% NDTL
17-Apr-12 Repo +100 1) Banks can borrow against excess SLR 2) Below SLR: 2% NDTL
17-Jul-13 Repo +300 1) Banks can borrow against excess SLR 2) Below SLR: 2% NDTL and additional 0.5% of NDTL for helping MFs
20-Sep-13 Repo +200 1) Banks can borrow against excess SLR 2) Below SLR: 2% NDTL and additional 0.5% of NDTL for helping MFs

The current MSF has two components:

  • Excess SLR: Banks can borrow under MSF in lieu of whatever excessive SLR they have. There is no limit here…So say a bank has SLR of 28% and needs funds, it can borrow from RBI funds worth 5% (of its NDTL).
  • Below SLR: What if a bank does not have excess SLR? Can it borrow? Yes it can. Currently RBI allows banks to borrow 2% of NDTL below SLR under MSF and and funds worth 0.5% of NDTL for providing assistance to Mutual Funds.. So, say a bank has 23% SLR, it can borrow funds under MSF worth 2%. In Jul-13 and 0.5% for helping MFs.

When MSF became a policy measure in May-11, banks were only given the second option of borrowing in case it does not have an excess SLR. The limit was 1%. In Dec-11, Banks were given the excess SLR choice and in 17-Apr-12 policy,

But MSF remains mostly unused, as one can borrow from RBI at a lower rate. MSF is higher than Repo by 1% for most part of its history. In normal times, banks usually borrow under Repo even when liquidity tightens. There are a very few cases of MSF utilization. It is only used when a player is unable to get funds from either markets or Repo.

However things changed recently, First, RBI capped borrowing undet Repo to 1% of NDTL on 16-Jul-13 and then further to 0.5% of NDTL on 23-Jul-13. The last move implied banks could borrow only about Rs 38,000 Cr from RBI and had to manage the rest via either MSF or via money markets. Even the difference was widened to 3% in Jul-13 when RBI took measures to curb Rupee Depreciation.

From the data I have from 1-Oct-12 to 20-Sep-13 which is 219 trading days, Banks used the window 56 times, out of which 39 times has happened because of recent RBI measures. banks have been using the MSF window continuously since 25-Jul-13.  From Aug-7 onwards, banks were borrowing from MSF in the range 40-60k Cr which increased to 1 lakh Cr plus because of advance tax flows. It is back to 40-60k range. In the remaining 17 days, one sees amounts of as low as 1 Cr (5-Jun-13) to 7000 Cr (31-Mar-13; due to year ending). I don’t think the picture will change much if I use the data from the inception of MSF in May-11.

All this data is given in WSS with a  lag and daily data comes in RBI’s Money Mkt Operations released daily http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29685

So this is nuts and bolts of MSF….Hope it helped..

One Response to “RBI’s Marginal Standing facility — Basics and Some history”

  1. Gaurav Tiwari Says:

    It surely helped and cleared the haze. Thank you 🙂

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