Difference Between Repo Rate and MSF Rate, Repo Rate Vs MSF Rate
The main difference between Repo Rate and MSF Rate. When the banks need money to meet their day-to-day obligations, they approach RBI to borrow required money. Repo rate is a rate at which banks borrow money from RBI against the sale of government securities. Repo rate is an abbreviation of Repurchase Rate.
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 Repo Rate and MSF Rate which are listed in the following table:
Repo Rate Vs MSF Rate
| Basis of Difference | Repo Rate | MSF Rate | |
|---|---|---|---|
| Definition | Repo rate is a rate at which banks borrow money from RBI against the sale of government securities | Vs | MSF rate is the rate at which the these banks can borrow funds overnight from RBI against government securities |
| Purpose | To fulfill the deficiency of funds of the banks | 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 repo rate means the cost of short-term money is very high which may slowdown the economic growth | Vs | Cost of borrow of overnight money will increase |
| Rate | Lower than MSF Rate | Vs | Higher than Repo Rate |
| Control | Repo Rate controls inflation in the economy | Vs | Controls the mismatch in short-term asset liability more effectively |
| Higher Rate results into | Banks will borrow less from the RBI | Vs | Reduces money supply in the economy |
| Collateral | Selling bank's securities as collateral to the RBI | Vs | Provide government securities as collateral to the RBI |
| Duration | To meet short-term financial needs | Vs | Overnight lending to banks |