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In yet another move to ease liquidity for banks, the Reserve Bank of India on Monday eased interest rate on borrowings under the marginal standing facility (MSF) by 50 basis points (bps) to 9 per cent.
The MSF is an emergency window that banks borrow from when faced with a funds crunch. Mohan Shenoi, President – Group Treasury, Kotak Mahindra Bank, said, “This will reduce the cost of borrowings for banks by 0.5 per cent. Hence, the cost of wholesale deposits may move down by about 25 bps. However, banks will wait till the monetary policy on October 29 to cut retail deposit rates.”
The RBI cut the MSF rate by 75 bps to 9.5 per cent from 10.25 per cent in September as part of its liquidity easing measures.
Earlier in July, the RBI raised the MSF rate by 200 bps to 10.25 per cent to stabilise the volatile rupee. Effectively, this saw the cost of borrowing under this window go up 300 bps over than the repo rate.
The MSF facility was introduced in 2011 by the RBI to contain volatility in the inter-bank overnight market. The interest rate was fixed at 100 bps above the repo rate, which is the rate at which banks borrow from the RBI for the short term against the collateral of government securities.
The RBI on Monday also conducted open market operations (OMOs) to the tune of Rs 9,974 crore to inject liquidity into the system. OMO is the buying and selling of government securities by the RBI to expand or contract the amount of money in the banking system.
Term repos
In addition, on a review of evolving liquidity conditions and in continuation of this calibrated unwinding, the RBI decided to “provide additional liquidity through term repos of 7- and 14-day tenors for a notified amount equivalent to 0.25 per cent of net demand and time liabilities (NDTL) of the banking system through variable rate auctions on every Friday beginning October 11, 2013.
The notified amount and tenor of the term repo auctions will be announced prior to the dates of the auctions.
Detailed guidelines with regard to term repos are being issued separately, it added.
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