Marginal standing facility rate increased to 10.5 %

With the continuing slide in rupee upsetting the calculations of the monetary and fiscal authorities alike, the Reserve Bank of India (RBI), on Monday, recalibrated the marginal standing facility (MSF) rate.

Introduced in its policy for 2011-12, the MSF allows banks to borrow funds from the RBI at 8.25 per cent, which is 100 basis points above the liquidity adjustment facility (or the repo rate), against pledging the approved government securities. This is expected to make loans costlier.

The RBI now increased the MSF rate to 10.25 per cent. This will be 300 basis points above the policy repo rate under the liquidity adjustment facility. The increase comes into effect with immediate effect.

The RBI action must also be viewed in the context of widespread perception that the likely “tapering of U.S. quantitative easing’’ has triggered outflows of portfolio investments, particularly from the debt segment.

As a consequence of the increase in the MSF rate, the Bank Rate also stands adjusted to 10.25 per cent, the RBI said in a late evening release.

The apex bank also said the overall allocation of funds under the LAF would be limited to one per cent of the net demand and time liabilities of the banking system. This is estimated to be around Rs.75,000 crore.

“The allocation to individual banks will be made in proportion to their bids,’’ the RBI said. This change in LAF would come into effect from July 17, it added.

The RBI, in the meanwhile, said it would conduct open market sales of government securities worth Rs.12,000 crore on July 18.

The monetary regulator said “it will continue to closely monitor the markets, liquidity situation, and the macro-economic developments.’’ It went on to suggest that it would take “such measures as may be necessary, consistent with the growth-inflation dynamics and macro-economic stability.’’

>>A sentence in “RBI steps in to ease rupee volatility” (July 16, 2013, Business page) read: “The RBI now increased the MSF [marginal standing facility] rate to 10.5 per cent.” It should have been 10.25 per cent.

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