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Liquidity adjustment facility (LAF) and Marginal Standing facility (MSF): Understanding Monetary Policy (for UPSC CSE)
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This lesson covers the 2 most important concepts in monetary policy: Liquidity adjustment facility (LAF) and Marginal Standing facility (MSF). It starts with the definition of LAF, how LAF works and its importance. It then goes on to deal with the MSF, which is a new form of LAF, which helps in overnight borrowing of banks. This lesson also covers the important reasons as to why the MSF was introduced.

Ayussh Sanghi is teaching live on Unacademy Plus

Ayussh Sanghi
Passionate Educator - CSE / Other Govt Exams [Peep into my Unacademy Plus Courses & experience awesome learning.]

Unacademy user
sir pls can you explain in English because I'm a south indian student..... I have don't understand Hindi....sorry sir...
Dear Ramkrishnan, I would have definitely obliged your request had I have surplus time..... I think there must be lessons in English also on platform so I can watch them ..thanks
sir, if minimum credit limit under LAF is 5 crore then how can it be only 1 crore for MSF? It should be 10 crores atleast.
hello sir..msf is always 1% higher dan repo rate ad lsf is always 1 % is less dan repo rate na? den u mentioned lsf is 2% higher than repo
Amazing explanation about each and every aspect. Anybody who watches your lesson will not only crack UPSC but also enjoy Economics. Watching your lesson is like reading an entire book in 10 minutes. Thanks a lot for the efforts you have put in. I don't come from an Economics background which makes such courses are even more helpful.
Ayussh Sanghi
2 years ago
Thanks for your kind words.
Sir please complete the whole economics syllabus for UPSC. Your teaching has helped me a lot . I am economically unable to join any coaching centre to get learned. Hope you will help such students.

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  3. 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.

  4. 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.

  5. 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.

  6. 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

  7. 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

  8. 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.

  9. 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.