How RBI’s Marginal Standing Facility was proposed to be named Exceptional Standing Facility…

Today is a day on central bank semantics.

I was going through RBI’s Report of the Working Group on Operating Procedure of Monetary Policy released in 2011. This report forms the backdrop of the current framework of RBI. Earlier we just had LAF repo and reverse repo forming the corridor, This report made Repo the main policy rate with Rev repo and Marginal Standing Facility forming the corridor.

However, the report proposed MSF as Exceptional SF:

The prescription of the Bank Rate by itself will not make it active unless there are liquidity facilities linked to the Bank Rate. The Group recommends the institution of a collateralised Exceptional Standing Facility (ESF) at the Bank Rate up to one per cent of the NDTL of banks carved out of their required SLR portfolio. This facility is not entirely new. In the recent episode of liquidity tightness, the RBI has been providing additional liquidity up to 1 to 2 per cent of NDTL but on an ad hoc basis at the repo rate. The Group’s recommendation is to have the facility on a standing basis. The advantages of this facility are four-fold. First, it will provide an upper bound to the policy rate corridor. Second, it will provide a safety valve against unanticipated liquidity shocks. Third, it will help stabilise the overnight interest rate around the repo rate in a liquidity deficit situation. Fourth, it will enhance the liquidity attribute of the SLR portfolio without compromising its prudential nature.

This Exceptional was changed to Marginal…Some may ask – What is in a name? Well in this case it is significant. Again there is no evidence and just my educated guess (love the term)

Exceptional is a strong word and it could mean anything. Is some player borrowing money here an exception as in can’t get any money elsewhere? Is RBI making an exception by lending money to this player? Eitherways suggests a firm in real stress will get access to the window.

This has far stronger connotation than marginal. Marginal here simply suggests on the margin or a small shortfall. So a bank which despite its active management faces a small shortfall at end of day, can access the MSF window.

So just a small name change gives a different meaning,. ESF indicates serious trouble whereas MSF suggests more routine stuff. Overall things remain the same.

Likewise, there is another kind of confusion.

Marginal Standing Facility is seen as part of LAF Repo and Rev Repo corridor but is categorised as Standing Liquidity Facility  along with Export Credit Refinance and Liquidity facility for Primary Dealers called PDLAF).

This leads to following questions:

  • Why is MSF called a standing liq facility (SLF)? What is standing facility? I have searched literature but could not find something concrete. My best guess is it is literally a standing facility always available outside the door of a bank in case a bank needs funds. Just like Export credit refin, it is another facility available to banks at end of day to get funds. (Though confusion remains — did we have something called stilling/sleeping liquidity facility earlier? Why standing and not running? :-))
  • How does it differ from Export credit refin? Well export credit refin is for 180 days (PD facility for 90 days) so it is a continuous facility. MSF is for overnight purposes. Hence, in liquidity management by RBI one sees liquidity by Repo and MSF as absolute number and in Stanto withding liq facility (includes both ECF and PD LAF) as changes…So, MSF is classified as a SLF but like Repo and Rev Repo is an overnight facility.
  • What about LAF repo/reverse repo? Well as the term LAF suggests it is Liquidity Adjustment Facility and not Standing Liquidity Facility. LAF is RBI’s first response to adjust for liquidity changes in the system. Therefore it also becomes the banks first choice to get funds from RBI. It is then followed by SLFs — MSF for overnight and other SLF for a longer duration purpose.
  • Important to note that Repo is used  to get funds from RBI and Rev Repo for placing surplus funds. MSF and SLF are just about borrowing funds from RBI. All are collateralised..

I hope have confused the reader enough..:-) We clearly need really simple stylised notes to figure all these jargons…

Next time someone asks what is in a name? Well ask the central banks (in this case RBI)..

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One Response to “How RBI’s Marginal Standing Facility was proposed to be named Exceptional Standing Facility…”

  1. Hatshof Says:

    Gran trabajo .. Gracias

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