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Jul 16, 2013, 01.57 PM IST | Source: Moneycontrol.com

What is MSF? How MSF hike will help curb rupee volatility?

Last week the Indian currency touched an all-time low of 61.21 vis-a-vis USD. The Reserve Bank of India had not stepped in to curb rupee fall initially, but after a meeting with the government decided to raise the marginal standing facility or MSF.

Moneycontrol Bureau

Last week the Indian currency touched an all-time low of 61.21 vis-a-vis USD. The Reserve Bank of India had not stepped in to curb rupee fall initially, but after a meeting with the government decided to raise the marginal standing facility or MSF.

As a result of RBI's  first strong measure to support the currency, the INR jumped more than 1 per cent.

What is MSF
MSF is the rate at which banks can borrow from the RBI at an elevated rate against government securities during times of tight cash. The bank rate is linked to the MSF.

What has the RBI done

1. The RBI raised the Marginal Standing Facility (MSF) rate and Bank Rate each by 200 basis points to 10.25 per cent. Under MSF, the banks used to borrow money at the repo rate plus 1 percent, which was equal to 8.25 percent. But now, the MSF stands 300 bps above the repo (Repo @ 7.25 percent)

2. The RBI capped total funds available under its repo window at 1 per cent of banks' deposits. The overnight borrowing limit now stands at Rs 75000 cr for the entire banking system. Now the allocation to banks will be made according to their bids under the total ceiling.

3. It announced a Rs 12000 crore sale of government bonds for July 18. This will suck out liquidity.

Impact

These measures will make it unattractive for banks to borrow rupee (at cheap rates) and buy dollars (in the forward markets) and reduce pressure on the rupee.

These measures will prevent banks to go short on the USD. It will indirectly increase borrowing costs of banks as the main purpose is to restrict access to easy money in order to prevent speculation in the currency market. 

The move is seen as an indirect rate hike.

READ MORE ON  MSF, RBI , bonds , dollars , rupee

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