MSF Repo vs Reverse Repo vs SDF Flashcards
What is the Marginal Standing Facility (MSF) Repo?
The MSF Repo is a tool the Reserve Bank of India (RBI) uses that allows banks to borrow overnight funds against approved government securities. Banks use this as a last resort for short-term cash needs, and they pay a higher interest rate (penal rate) compared to other liquidity tools.
Describe the key differences between the Repo rate and the Reverse Repo rate.
Repo Rate: The rate at which the RBI lends money to banks against government securities. It is used to inject liquidity into the banking system.
Reverse Repo Rate: The rate at which the RBI borrows money from banks. It’s used to absorb excess liquidity from the banking system.
The Reverse Repo rate is always lower than the Repo rate to maintain a balance in the system.
Why would a bank choose to use the Standing Deposit Facility (SDF)?
Banks use the SDF to park surplus funds with the RBI overnight and earn a fixed interest rate. This is a low-risk option for banks to earn returns on excess liquidity.
Which of these RBI liquidity tools requires banks to provide collateral? Choose all that apply.
MSF Repo
Repo
Reverse Repo
SDF
MSF Repo, Repo, and Reverse Repo all require banks to provide collateral in the form of approved government securities.
What is the purpose of the RBI using liquidity management tools like MSF Repo, Repo, Reverse Repo, and SDF?
The RBI uses these tools to manage the amount of money (liquidity) in the banking system. This helps to control inflation, influence interest rates, and ensure smooth functioning of the financial markets.
If the RBI wants to increase liquidity in the banking system, which tool would they likely use and how?
The RBI would likely use the Repo tool. They would lower the Repo rate, making it cheaper for banks to borrow money from the RBI, encouraging increased borrowing and therefore more liquidity in the system.
If the RBI wants to decrease liquidity in the banking system, which tool would they likely use and how?
The RBI would likely use the Reverse Repo tool. They would increase the Reverse Repo rate, making it more attractive for banks to park money with the RBI, therefore reducing the amount of money circulating in the system.
True or False: The MSF Repo rate is always lower than the Repo rate.
False. The MSF Repo rate is always higher than the Repo rate because it is meant to discourage banks from relying on it heavily and is considered a last-resort option.
Explain the RBI’s discretion in Reverse Repo transactions.
The RBI can choose whether or not to accept surplus funds from banks and NBFCs through the Reverse Repo facility. They are not obligated to do so.
How does the RBI’s approach to the Marginal Standing Facility (MSF) differ from Reverse Repo?
Unlike Reverse Repo, the RBI cannot refuse a bank’s request for short-term funds through the MSF. The MSF serves as an emergency liquidity source for banks, ensuring stability in the financial system.
