Table of Contents
What is Bank Rate?
A bank is a financial institution that accepts deposits and channels those deposits into lending activities. Banks connect customers that have capital deficits to customers with capital surpluses.
When a bank lends money to a customer, the bank charges the customer an interest rate, which is a percentage of the total loan, over the course of a year. That interest rate is called the bank rate.
Unlike Repo Rate, there is no sale of security in Bank Rate. Also, at which a nation’s central bank lends money to domestic banks, in the form of very short-term loans.
It is the interest rate that the central bank of a country sets. This rate is used as a reference point for other rates in the economy. The bank rate is also known as the discount rate.
What is MSF Rate?
The MSF rate is the reserve bank of India‘s overnight lending rate to banks.
It is the marginal standing facility rate, which is the rate at which commercial banks can borrow funds from the Reserve Bank of India (RBI) in an emergency situation overnight against eligible securities.
The marginal standing facility (MSF) is a lending facility provided by the Reserve Bank of India to scheduled commercial banks (excluding regional rural banks and cooperative banks) against their eligible collateral.
Banks can use this facility only in case of severe cash shortage or acute shortage of liquidity.
The MSF rate is 100 basis points above the repo rate. The purpose of the MSF is to contain the volatility in the overnight lending rate in the inter-bank market.
Difference Between Bank Rate and MSF Rate
The bank rate and the MSF rate are both monetary policy tools used by the Reserve Bank of India (RBI) to control the supply of money in the economy.
- The bank rate is the rate of interest at which a central bank of a country lends money to commercial banks in the event of any shortfall of funds. The MSF rate is the rate at which commercial banks can borrow funds overnight from the central bank against approved securities.
- Major difference in Bank Rate and the MSF rate is that the MSF rate is charged on the amount over and above the credit limit, whereas the Bank Rate is charged on the entire amount of credit availed
- The difference between the two rates is the spread. The spread is the cost of funds for the banks.
- The MSF rate is higher than the bank rate.
- The difference between the two rates is the interest rate charged by RBI, The current repo rate is 4.00% and the MSF rate is 4.25%.
Comparison Table Between Bank Rate and MSF Rate
|Parameters of Comparison||Bank Rate||MSF Rate|
|Purpose||Based on the demand and supply of money in the economy||Banks can use this facility only in case of severe cash shortage or acute shortage of liquidity|
|Trend||Trending downwards over the past few years||Relatively stable|
|Volatile||More volatile than MSF Rate||Less volatile than Bank Rate|
|Usage||Used to signal RBI’s monetary policy stance||Used to manage liquidity in the banking system|
|Rate||Currently at 6.25%||Currently at 6.50%|