Update on Marginal Standing Facility-VRK100-20Jul2013

Rama Krishna Vadlamudi, HYDERABAD       20 July 2013
www.ramakrishnavadlamudi.blogspot.com

Indian rupee has been depreciating steeply against the US dollar ever since the US Federal Reserve has hinted at tapering its quantitative easing (QE3) programme. For the first time since its introduction in 2011, the Reserve Bank of India (RBI) has used its marginal standing facility (MSF) to control depreciation of Indian rupee against the US dollar. The measures initiated by RBI on 15 July 2013 to rein in rupee volatility are:

a). The MSF rate has been readjusted to 300 basis points (from the earlier 100 basis points) above the policy Repo rate under the Liquidity Adjustment Facility (LAF). As such, the MSF rate is raised to 10.25 per cent from 8.25 percent with effect from 16Jul2013.

b). Accordingly, Bank Rate has been raised to 10.25 percent with effect from 15Jul2013 (since 13Feb2012, Bank Rate has been made equal to MSF rate)

c). With effect from 17Jul2013, the total amount under RBI’s LAF is restricted to one percent of the net demand and time liabilities (NDTL) of the banking system, reckoned as Rs 75,000 crore

d). RBI would sell government securities to the tune of Rs 12,000 crore on 18Jul2013 as part of its open market operations (OMO)

What is Marginal Standing Facility (MSF)?

The MSF was started by RBI during the Annual Policy statement announced by it on 03 May 2011. The MSF facility was made effective from 09 May 2011.

The marginal standing facility is an additional window provided by RBI to banks, so that the latter can borrow overnight funds from RBI against their excess SLR (statutory liquidity ratio) holdings. MSF scheme is similar to LAF-Repo scheme. The difference between MSF and LAF-Repo is that under MSF, banks will have to pay higher rate of interest to RBI for their borrowings as compared to LAF-Repo.

Banks will look for the MSF window to borrow money from RBI once they exhausted all other avenues (like, call money market, LAF-repo window, Collateralized Borrowing and Lending Obligation or CBLO, market repo, etc.) for overnight money. Under exceptional circumstances, banks will borrow money through MSF window.

What are the Salient Features of MSF?

1. The Objective of MSF:

This facility is expected to contain volatility in the overnight inter-bank money market.

2. Eligibility:

All scheduled commercial banks (SCBs) are eligible to borrow from RBI under MSF.

3. Tenor and Amount:

With effect from 17Apr2012, Banks can borrow overnight funds up to two percent of their NDTL. In general, the borrowing is for one day except on Fridays when the facility will be for three days. Banks can continue to access the MSF even if they have excess SLR holdings. (Prior to 17Apr2012, banks were allowed to borrow funds up to one percent of their NDTL under MSF).

4. Rate of Interest:

With effect from 16Jul2013, banks under MSF have to pay interest at the rate of 300 basis points or three percentage points above the LAF-Repo rate. At present, LAF-Repo rate is 7.25 percent and as such, the MSF rate is 10.25 percent. So, whenever LAF-Repo rate is revised by RBI, the MSF rate will be revised accordingly. Prior to 16Jul2013, MSF rate was linked to 100 basis points above LAF-Repo rate.

5. Minimum Size:

Under MSF scheme, banks will have to make requests for a minimum of Rs one crore and in multiples of Rs one crore thereafter.

6. Eligible Securities:

They are Government of India Dated Securities/Treasury Bills and State Development Loans (SDL).

7. Margin Requirement:

A margin of five percent is required for GOI Dated Securities and Treasury Bills; and for SDLs, it is 10 percent. So, banks will have to offer Rs 105 (face value) worth of GOI Dated Securities and Treasury bills for a request of Rs 100; and Rs 110 (face value) worth of SDLs for a request of Rs 100.

MSF Rates since Beginning:

Graph showing the MSF rates since inception:

Special Repo Window for Mutual Funds:

RBI had on 17Jul2013 provided a special repo window whereby banks can avail funds from RBI to meet the liquidity requirements of mutual funds. Under this special repo window, banks can avail liquidity assistance from MSF up to 0.5 percent of NDTL, which is over and above the two percent (of NDTL) regular MSF window. This additional limit of 0.5 percent of NDTL will be available for a temporary period till further notice.

Off-beat Move by RBI:

By increasing MSF rate to curb rupee volatility, the RBI has acted in an off-beat manner to the surprise of market participants. Though the stated objective of RBI in raising MSF rate is to address exchange rate volatility, the market participants have interpreted the measure as raising short-term interest rates. The bond markets have panicked and bond prices have fallen sharply with bond yields shooting up much to the chagrin of investors. In the equity markets, banking stocks have fallen steeply due to liquidity squeeze and Treasury losses from bond portfolios.  

- - -

Reference: RBI

Disclaimer: The author is an investment analyst and freelance writer. His articles on financial markets and Indian economy can be reached at:

http://ramakrishnavadlamudi.blogspot.in/ or www. scribd.com/vrk100


Note: Please check the comment attached below, made on 05Dec2018 by me, for interest rate on MSF, which is now 25 basis points above the LAF Repo rate.