It is the interest rate at which a country’s central bank loans money to its own banks. It may be granted for a shorter or longer time period and is often secured by government securities. The MSF rate is the interest rate that the nation’s central bank (RBI) charges its domestic banks in times of crisis, such as when interbank liquidity is completely depleted.
Bank Rate Vs. MSF Rate
The bank rate is a reduced interest rate that the central bank offers to commercial banks and other financial institutions, while the MSF rate is a standard interest rate. It’s a rate at which the central bank lends money to commercial banks over night called the MSF (Marginal Standing Facility).
Rates for banks and money supply funds (MSFs) date back to the year 1900 and 2011, respectively. During this time, the banks may only borrow one percent of their total demand.
What is the Bank Rate?
It is the interest rate that the country’s central bank lends to its domestic banks. Economic activity in the nation is heavily influenced by the bank rate.
Inflation can be restored by raising the bank rate, while economic growth may be accelerated by lowering the bank rate. The bank rate is lower than the MSR rate since it is often offered for longer-term loans.
What is the MSF Rate?
When liquidity in the interbank market runs out, the central bank will use its MSF rate to borrow money from its domestic banks. MSF stands for Marginal Standing Facility (MSF).
In order to prevent this from happening on a regular basis, it has been raised. It’s also only available for a brief amount of time.It is determined by multiplying the repo rate, which is the national bank’s short-term lending rate to local banks, by one.
The MSF rate is equal to the repo rate multiplied by 1%.
Difference Between Bank Rate and MSF Rate
- At a time when interbank liquidity is scarce, a country’s central bank must borrow money from its domestic banks at a higher interest rate than it can get from its domestic banks at the MSF rate.
- Long-term loan rates endure for a long time, but short-term loan rates only persist for a short time.
- The nominal interest rate charged by banks is greater than the MSF rate.
- Economic growth is encouraged by a lower Bank rate, while local banks have a greater need for money as a result of a lower MSF rate.
- However, when the Bank rate is higher, the currency value is restored and inflation is reduced. A lower frequency of requests for assistance from the central bank is ensured by a higher MSF rate.
- In contrast to MSF rate loans, bank rate loans may take place at any moment.
- A central bank loan is available to any financial organization, regardless of size or kind. Only SCBs affiliated with the central bank are eligible for MSF rate loans.
- There is a 1% cap on net demand for second-lien loans while the first-lien loans are capped by the amount of government securities offered.
- MSF rates were first implemented by the Reserve Bank of India (RBI) in its 2011-2012 monetary policy, although bank rates have been around for a long time.
- Because money is borrowed overnight, the MSF rate is also known as the overnight rate and the bank rate as the discount rate.
- The first rate is decided by the National Bank of the nation, while the second is derived by adding one percent to the repo rate, depending on the country’s monetary policy. There are two types of repo rates: short-term repo rates and long-term repo rates.
When a bank or financial institution borrows money from a central bank, the interest rate they are charged is known as the bank rate, whereas the MSF rate is known as the MSF rate.
For example, the former is used when interbank liquidity has completely dried up, but the latter is used when a domestic bank faces a financial emergency.
The central bank normally sets the MSF rate higher than the Bank rate in order to limit these emergency borrowings.