Difference Between Bank Rate and MSF Rate
The rate at which banks borrow money from the RBI without any sale of securities is called the Bank rate. Unlike Repo Rate, there is no sale of security in Bank Rate. Such money is borrowed by banks comparatively for a longer period of time.
Marginal Standing Facility (MSF) is a very short term borrowing facility available to the scheduled commercial banks. MSF rate is the rate at which the these banks can borrow funds overnight from RBI against government securities. Banks can use this facility only in case of severe cash shortage or acute shortage of liquidity. An increase in the MSF rate results into higher borrowing cost for the banks and hence, reduces money supply in the economy.
There are many differences between Bank Rate and MSF Rate which are listed in the following table:
Difference between Bank Rate and MSF Rate
| Basis of Difference | Bank Rate | MSF Rate | |
|---|---|---|---|
| Definition | Bank Rate is the rate at which banks borrow money from the RBI without any sale of securities | Vs | MSF rate is the rate at which the these banks can borrow funds overnight from RBI against government securities |
| Purpose | Based on the demand and supply of money in the economy | Vs | Banks can use this facility only in case of severe cash shortage or acute shortage of liquidity |
| Controlled by | Reserve Bank of India | Vs | Reserve Bank of India |
| Impact on Cost | Higher the bank rate, higher will be the long-term interest rates | Vs | Higher the MSF rate means higher the overnight borrowing cost of funds for the banks |
| Control | Demand and supply of money in the economy | Vs | Controls the mismatch in short-term asset liability more effectively |
| Higher Rate results into | If the bank rate goes up, long-term interest rates also tend to move up | Vs | Higher borrowing cost for the banks and hence, reduces money supply in the economy |
| Collateral | Not involved | Vs | Provide government securities as collateral to the RBI |
| Duration | Long term | Vs | For overnight |