Understanding Marginal Standing Facility Effect on Interest Rates on Home Loans - Loan Trivia


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Monday 24 June 2024

Understanding Marginal Standing Facility Effect on Interest Rates on Home Loans

marginal standing facility

The Marginal Standing Facility (MSF) is a safety net offered by the Reserve Bank of India (RBI) that permits commercial banks to borrow additional money during times of acute cash shortage. Instituted in 2011, the MSF permits banks to obtain direct capital infusion from RBI against approved government securities within a specific limit.

Impact on Lending Rates

The fluctuating rates of the MSF have a direct impact on the lending rates, especially on home loans. Essentially, the MSF and the repo rate form the corridor for the policy rate, which influences the interest rates in the market. If RBI increases the MSF rate, banks will have to pay a higher interest rate to RBI for borrowing money. This increase in cost is transferred to the customers, leading to an escalation in interest rates on home loans. On the contrary, a decrease in the MSF rate leads to a reduction in interest rates on home loans.

Role in Macroeconomic Stability

The role of the marginal standing facility is crucial in macroeconomic stability. It encourages banks to maintain a steady balance between their Net Demand and Time Liabilities (NDTL) and maintain their SLR requirement. Moreover, MSF rate changes serve as a pivotal signal to the banking industry and financial markets about the direction RBI wants interest rates to move.

Importance for Borrowers

Consequently, any individual considering a loan, especially a home loan, should keep an eye on the changes in the MSF rate. A sound understanding of the MSF can aid potential borrowers in comprehending the reasons behind fluctuations in the interest rates and help them in making informed decisions. The MSF, thereby, is a crucial instrument in India's monetary policy framework, influencing interest rates on home loans.

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