Question

In the context of Reserve Bank of India’s monetary policy, which one of the following options represents the CORRECT order of magnitude?

• A. Marginal Standing Facility rate \(>\) Repo rate \(>\) Reverse Repo rate
• B. Marginal Standing Facility rate \(>\) Reverse Repo rate \(>\) Repo rate
• C. Repo rate \(>\) Reverse Repo rate \(>\) Marginal Standing Facility rate
• D. Repo rate \(>\) Marginal Standing Facility rate \(>\) Reverse Repo rate

Hint:

In RBI’s liquidity adjustment framework: \[ \text{MSF Rate} > \text{Repo Rate} > \text{Reverse Repo Rate} \] MSF is the highest because it is an emergency borrowing facility.

Answer 1

The Correct Option is A

Step 1: Understand the Repo Rate.
The Repo Rate is the rate at which the Reserve Bank of India lends short-term funds to commercial banks against government securities.
It acts as the main policy interest rate.

Step 2: Understand the Reverse Repo Rate.
The Reverse Repo Rate is the rate at which the RBI borrows money from commercial banks.
Since RBI borrows from banks under this facility, the reverse repo rate is generally lower than the repo rate.
Thus,
\[ \text{Reverse Repo Rate} < \text{Repo Rate} \]

Step 3: Understand the Marginal Standing Facility (MSF) Rate.
The MSF Rate is the emergency borrowing rate at which banks can borrow overnight funds from RBI beyond the statutory liquidity ratio limit.
Since it is a penal or emergency borrowing facility, the MSF rate is generally higher than the repo rate.
Thus,
\[ \text{MSF Rate} > \text{Repo Rate} \]

Step 4: Arrange the rates in correct order.
Combining the above relations, we get
\[ \text{MSF Rate} > \text{Repo Rate} > \text{Reverse Repo Rate} \]

Step 5: Final conclusion.
Therefore, the correct order is
\[ \boxed{\text{Marginal Standing Facility rate}>\text{Repo rate}>\text{Reverse Repo rate}} \]
Hence, the correct option is (A).