What is the difference between repo rate, reverse repo rate, and MSF?
The Reserve Bank of India (RBI) possesses numerous monetary policy tools that influence interest rates. Repo rate, reverse repo rate, and MSF are quantitative instruments that the central bank employs to influence the money supply in the economy.
Repo rate, commonly referred to as the benchmark interest rate, is the rate at which the RBI lends short-term funds to banks. The cost of borrowing from RBI increases as the repo rates increase. In turn, this increases the interest rate in the economy, reducing the overall money supply.
If the RBI want to increase the cost of borrowing money for banks, it will boost the repo rate. Similarly, if the government wishes to make it cheaper for banks to borrow money, the repo rate is reduced.
Reverse Repo rate is the short-term borrowing rate at which the Reserve Bank of India borrows funds from banks. This instrument is used by the central bank to alter the money supply in the economy.
A rise in the reverse repo rate indicates that the banks would get a higher interest rate from the Reserve Bank of India. Therefore, banks prefer to lend their money to RBI, which is always safe, rather than lending it to others (individuals, businesses, etc.), which is regarded dangerous.
Marginal Standing facility (MSF) – It is a special window for commercial banks to borrow against certified government securities from the RBI in the event of an emergency such as a severe cash shortfall. The MSF rate is typically greater than the Repo rate.
A rise in the MSF rate increases the cost of borrowing for banks, which affects the money supply in the economy.