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 DifferenceRepo Rate MSF Rate
DefinitionRepo 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
PurposeTo 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 byReserve Bank of India
Vs
Reserve Bank of India
Impact on CostHigher 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
RateLower than MSF Rate
Vs
Higher than Repo Rate
ControlRepo Rate controls inflation in the economy
Vs
Controls the mismatch in short-term asset liability more effectively
Higher Rate results intoBanks will borrow less from the RBI
Vs
Reduces money supply in the economy
CollateralSelling bank's securities as collateral to the RBI
Vs
Provide government securities as collateral to the RBI
DurationTo meet short-term financial needs
Vs
Overnight lending to banks