With reference to the Marginal Standing Facility MSF consider the following statements 1 Its aim is ...........

Indian Economy (CDS) Money and banking

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With reference to the Marginal Standing Facility (MSF), consider the following statements:

1. Its aim is to reduce volatility in the overnight lending rates in the interbank market.

2. Borrowing rate under this facility is always higher than the repo rate.

3. The facility was introduced by the Reserve Bank of India during the 2016 demonetization.

Which of the statements given above is/are correct?

1 only

2 only

1 and 2 only

1, 2 and 3

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Explanation:

• Marginal Standing Facility (MSF) is a new scheme announced by the Reserve Bank of India (RBI) in its Monetary Policy (2011-12) and refers to the penal rate at which banks can borrow money from the central bank over and above what is available to them through the LAF window. Hence statement 3 is not correct. • MSF, being a penal rate, is always fixed above the repo rate. The MSF would be the last resort for banks once they exhaust all borrowing options including the liquidity adjustment facility by pledging government securities, where the rates are lower in comparison with the MSF. Hence statement 2 is correct. • The MSF would be a penal rate for banks and the banks can borrow funds by pledging government securities within the limits of the statutory liquidity ratio. The scheme has been introduced by RBI with the main aim of reducing volatility in the overnight lending rates in the inter-bank market and enabling smooth monetary transmission in the financial system. Hence statement 1 is correct.