Repo Rate or repurchase auction rate is one at which the Reserve Bank of India, buys back Government Securities, from the commercial banks, based on the level of liquidity, the central bank wants to maintain in the country’s economy. The central bank uses this as a tool to increase or decrease the supply of money in the economy.
Definition of Repo Rate
Repo Rate is referred to as a discounting rate at which the central bank i.e., the Reserve Bank of India (RBI) lends money to the commercial banks against repurchase agreement of government securities. Here, repurchase agreement means the central bank will lend money against the pledge of government securities, which would be bought back by the bank itself after a stipulated period. Repo also stands for repossession or repurchase option.
It is a monetary tool used by the superior authorities for controlling the inflation in the economy i.e. if they want to control the inflation and reduce the borrowings from RBI, they will increase the rate while, if they want to increase the borrowings from RBI they will reduce the rate.
Definition of MSF Rate
Marginal Standing Facility Rate abbreviated as MSF Rate, is a rate of interest at which the central bank i.e the Reserve Bank of India (RBI) lends money overnight to the Scheduled Commercial Banks against an approved government securities of Statutory Liquidity Ratio (SLR) quota (securities which are in excess of the current SLR can be pledged) up to a certain percentage of their Net Demand and Time Liabilities (NDTL). But, however, if the bank doesn’t have such securities, then also the funds can be provided, but subject to some penal charges.
The Scheduled Commercial Banks which are having their Current Account and a Subsidiary General Ledger with RBI are eligible to facilitate the borrowings but, it is at the discretion of RBI whether to grant the loan or not.
|BASIS FOR COMPARISON||REPO RATE||MSF RATE|
|Meaning||It is the discounting rate at which the commercial banks borrow money from the central bank at the time of deficiency of funds.||It is the discounting rate at which the commercial banks borrow money from the central bank overnight against securities.|
|Aim||To control inflation.||To maintain permanency in overnight lending rates.|
|Pledging of security||Pledging of government bonds is done, which is further repurchased by the banks.||Pledging of securities of SLR quota which is in excess of the current SLR can be pledged. Banks can also sell the securities to the central bank.|
|Eligibility||All commercial banks are eligible.||All scheduled commercial banks having their Current Account and Subsidiary General Ledger with the central bank are eligible.|