Ayussh Sanghi is teaching live on Unacademy Plus
MONETARY POLICY LAF and MSF PART 7 BY AYUSSH SANGHI
ABOUT ME >Passionate about Teaching >Taught at most reputed Civil Services Institutes >CA, Lawyer >Hit "Contribute to Ayussh" Follow me on: https://unacademy.in/user/ AyusshSanghi
Liquidity Adjustment Facility This is the primary instrument of Reserve Bank of India for modulating liquidity and sending interest rate signals to the market. k It refers to the difference between the two key rates: * It refers to the difference between the two key rates repo rate and reverse repo rate. Alternatively, Liquidity Adjustment Facility is also known as Liquidity Corridor.
How Liquidity Adjustment Facility works? k The two components of LAF are repo rate and reverse repo rate * Under Repo, the banks borrow money from RBI to meet short term needs by putting government securities (G-secs) as collateral Whereas under Reverse Repo, RBI borrows money from banks by lending securities.
How Liquidity Adjustment Facility works? * While repo infuses liquidity into the system, the Reverse repo absorbs the liquidity from the system. RBI just announces Repo Rate. The Reverse Repo Rate is linked to Repo Rate and is 100 basis points (1%) below repo rate. RBI takes a decision regarding Repo Rate on the basis of prevalent market conditions and other factors.
Marginal Standing Facility Marginal Standing Facility is a new Liquidity Adjustment Facility (LAF) created by Reserve Bank of India in its credit policy of May 2011 * Marginal Standing Facility is a new Liquidity MSF is the rate at which the banks are able to borrow overnight funds from RBI against the approved government securities
Reason for MSF In order to curb the problem of volatility in inter- bank interest rates in the overnight rate, banks are allowed to borrow more funds against G-secs as collateral from the RBI at a rate 100 basis points above the Repo Rate. * Hence MSF is always 1% higher than Repo Rate Xx
Difference between Repo Rate and Marginal Standing Facility? * Repo Rate and Reverse Repo rate are the policy instruments of RBI. * This corridor between Repo and Reverse Repo is called Liquidity Adjustment Facility.
Difference between Repo Rate and Margina Standing Facility? * The minimum credit limit under Liquidity Adjustment Facility is Rs. 5 crore; the same is Rs. 1 crore under Marginal Standing Facility * The interest rate in MSF is 1% (100 basis points) above Repo Rate and 2% (200 basis points) above the Reverse Repo Repo Rate.