Marginal Standing Facility (MSF) rate refers to the rate at which the scheduled banks can borrow funds overnight from RBI against government securities.
MSF is a very short term borrowing scheme for scheduled commercial banks. Banks may borrow funds through MSF during severe cash shortage or acute shortage of liquidity.
Banks often face liquidity shortfalls due to mismatch in their deposit and loan portfolios. These are usually very short term and banks can borrow from RBI for one day period by offering dated government securities.
MSF had been introduced by RBI to reduce volatility in the overnight lending rates in the inter-bank market and to enable smooth monetary transmission in the financial system.
Under MSF, banks can borrow funds overnight up to 1% (100 basis points) of their net demand and time liabilities (NDTL) i.e. 1% of the aggregate deposits and other liabilities of the banks. NDTL liabilities represent a bank's deposits and borrowings from others.
In a move to stem the continuing fall of rupee, the RBI raised the MSF rate to 300 basis points (i.e. 3%) above the repo rate in July 2013. Thus, both rate of borrowing and percent of borrowing allowed under MSF can be varied by RBI.
Introduction of MSF
Does a hike in MSF rate affect us?
Borrowing under MSF