RBI increases Marginal Standing Facility rate and Bank rate to 10.25%

Reserve Bank of India finally intervened to stem the flow of falling rupee since it increased the “Marginal standing facility rate” to 10.25 % from earlier 8.25%. The present MSF rates are now 3% above Repo rate which was earlier pegged to Repo rate at Repo +1%

• As Bank Minute rates are now linked to MSF it also adjusted to 10.25 %

Other decisions of RBI to evaluate falling Rupee

• W.e.f 17th of July 2013, overall allocation of funds beneath the LAF i.e. Repo system (overnight borrowing limit ) might be limited to 1% of net demand and time liabilities (banks’ total deposits) from the whole banking system (approx Rs.75,000 cr). The allocation to banks will probably be made in proportion to their bids beneath the total ceiling.
• RBI to conduct “open market sales of presidency securities” worth Rs.12,000 crore on July 18 (to take money from market)

Marginal standing facility rate (MSF)

• Introduced in RBI Monetary insurance plan for 2011 -12; with effect from May 9, 2011
• operational round the lines of the existing Liquidity Adjustment Facility (LAF i.e Repo and Reverse repo scheme where commercial banks may take a loan from RBI ) and allows banks to get into funds from the RBI against pledging the approved government securities
• basic difference with LAF is dependant on the fact that in MSF banks could use the securities under Statutory Liquidity Ratio or SLR to acquire loans from RBI and hence MSF rate was kept 1% greater than repo rate (but now it is 3% more)

Tenor and Amount

• all banks can avail for overnight (except on Friday when its designed for 3 or more days because of intervening holidays) as much as 1% of the respective Net Demand and Time Liabilities (NDTL- all the deposits of the bank) outstanding following the second preceding fortnight
• In case when the banks’ SLR holdings fall beneath the statutory requirement up to 1% of the NDTL, banks won’t have the obligation to find a specific waiver for default in SLR compliance arising from use of this facility

Reason to improve MSF

Continuous depreciation in the worth of rupee that is further sliding because of the recent feelers from U.S. that could start slowly pulling out its “quantitative easing” or perhaps the fiscal incentives that it had given to check slowdown of its economy. Because of this investors fear that US economy and for that reason world economy will again slowdown affecting world capital and securities market. Therefore to suit their investments (eg. vast amounts of dollars in portfolio investments ) in stable and safer economy like US they’re taking out from emerging markets like India having uncertain economic history.

Impact

• Tightening of liquidity and that makes it costlier for banks to get into funds from the central bank
• loans might get costlier as borrowing by banks from RBI could possibly get more costlier
• unattractive for banks to get into rupee (at cheap rates) and buy dollars (in the forward markets) and so reduce pressure on the rupee, checking further slide
• restrict utilization of easy money to prevent speculation inside the currency market