Daily News Analysis ‘Monetary Policy Committee (MPC), Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) ’ : 6 June

Why in News: 

• The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) kept the policy Repo Rate under the Liquidity Adjustment Facility (LAF) unchanged and retained its neutral stance.

Important Concepts and Features

• MPC (Monetary Policy Committee): Statutory body constituted under the Reserve Bank of India Act, 1934 to determine India’s policy interest rate for achieving the inflation target.
• Composition: 6 members — 3 from RBI (including the Governor) and 3 appointed by the Central Government.
• Chairperson: RBI Governor.
• Decisions are taken by majority vote; the Governor has a casting vote in case of a tie.
• Main Objective: Maintain price stability while supporting economic growth.

Liquidity Adjustment Facility (LAF)

• LAF (Liquidity Adjustment Facility) is a monetary policy tool used by RBI to manage short-term liquidity in the banking system.
• It consists mainly of:
  • Repo Rate: Rate at which RBI lends money to commercial banks against government securities.
  • Reverse Repo / Standing Deposit Facility (SDF): Mechanism through which banks park surplus funds with RBI.
• Helps control inflation, liquidity, and short-term interest rates.

Marginal Standing Facility (MSF)

• MSF (Marginal Standing Facility) is the emergency borrowing window for scheduled commercial banks.
• Banks can borrow overnight funds from RBI against approved government securities.
• MSF rate is generally higher than the Repo Rate, making it a lender-of-last-resort facility for banks.

Related Terms

• SDF (Standing Deposit Facility): Facility enabling banks to deposit surplus funds with RBI without collateral.
• Bank Rate: Rate at which RBI lends long-term funds to financial institutions; often aligned with the MSF rate.