The MSF (Marginal Standing Facility) rate is the interest rate at which the Reserve Bank of India (RBI) lends money to scheduled commercial banks facing a severe shortage of liquidity. According to the reference provided, it allows banks to obtain overnight funds from the RBI by paying this specific MSF rate.
Here's a breakdown:
- Definition: The MSF rate is the interest rate at which the RBI provides funds to banks facing a liquidity crunch.
- Purpose: It helps banks manage unexpected or sudden shortages of funds.
- Difference from Repo Rate: It is distinct from the repo rate, which is typically lower. The MSF is a penal rate, meaning banks use it when other borrowing options are exhausted.
- Overnight Funds: MSF is specifically for overnight borrowing.
In summary, the MSF rate serves as a crucial safety valve for the banking system, ensuring stability during periods of acute liquidity stress.
