an in in ndia          12.7
           In practice it is not called an interest rate but     mArginAl stAnDing fAcility (msf)16
     considered a discount on the dated government
                                                                 MSF is a new scheme announced by the RBI in
     securities, which are deposited by institution to
                                                                 its Monetary Policy, 2011–12 which came into
     borrow for the short term. When they get their
                                                                 effect from May, 2011. Under this scheme, banks
     securities released from the RBI, the value of the
                                                                 can borrow overnight upto 1 per cent of their
     securities is lost by the amount of the current repo
                                                                 net demand and time liabilities (NDTL) from
     rate. The Call Money Market of India (inter-bank
                                                                 the RBI, at the interest rate 1 per cent (100 basis
     market) operates at this rate and banks use this
     route for overnight borrowings. This rate has direct        points) higher than the current repo rate. In an
     relation with the interest rates banks charge on the        attempt to strengthen rupee and checking its
     loans they offer (as it affects the operational cost        falling exchange rate, the RBI increased the gap
     of the banks). The rate was 6 per cent in March             between ‘repo’ and MSF to 3 per cent (late July
     2018.                                                       2013).
           In October 2013, RBI introduced term repos                 The MSF rate has been floated as a penal rate
     (of different tenors, such as, 7/14/28 days), to            and since mid-2015 RBI has maintained it 1 per
     inject liquidity over a period that is longer than          cent higher than the prevailing repo rate. By end
     overnight. It has several purposes to serve—                March 2018 it was at 6.25 per cent, fully aligned
     stronger money market, stability, and better                with the Bank rate (i.e., equal to the Bank rate).
     costing and signalling of the loan products.
                                                                 other tools
     reverse rePo rAte                                           Other than the above-given instruments, RBI uses
     It is the rate of interest the RBI pays to its clients      some other important , too to activate the right
     who offer short-term loan to it. At present (March          kind of the credit and monetary policy—
     2018) the rate is at 5.75 per cent.                              (i) Call Money Market: The call money market
           It is reverse of the repo rate and this was started             is an important segment of the money
     in November 1996 as part of liquidity Adjustment                      market where borrowing and lending
     Facility (LAF) by the RBI. In practice, financial                     of funds take place on over night basis.
     instituions operating in India park their surplus                     Participants in the call money market
     funds with the RBI for short-term period and earn                     in India currently include scheduled
     money. It has a direct bearing on the interest rates                  commercial banks (SCBs)—excluding
     charged by the banks and the financial institutions                   regional rural banks), cooperative banks
     on their different forms of loans.                                    (other than land development banks),
           This tool was utilised by the RBI in the wake                   insurance. Prudential limits, in respect of
     of over money supply with the Indian banks                            both outstanding borrowing and lending
     and lower loan disbursal to serve twin purposes                       transactions in the call money market for
     of cutting down banks losses and the prevailing                       each of these entities, are specified by the
     interest rate.15 It has emerged as a very important                   RBI.
     tool in direction of following cheap interest
                                                                   16.   The write-up is based on the RBI’s Credit & Monetary
     regime—the general policy of the RBI since                          Policy, 2011-12 (in which the scheme was introduced);
     reform process started.                                             and the European Central Bank, Frankfurt, Germany
                                                                         and Federal Reserve System (also known as the Federal
       15.    Ministry of Finance, Economic Survey 2001–02, (New         Reserve, and informally as the Fed) Washington DC,
              Delhi: Government of India, 2002).                         USA