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: Take the repo rate as the centre.
The repo rate is the main rate at which the RBI lends short term to banks.

Step 2: Place the reverse repo.
The reverse repo is the rate at which the RBI borrows from banks. A borrower pays less, so
\[ \text{Reverse Repo}<\text{Repo} \]

Step 3: Place the MSF.
The marginal standing facility is an emergency overnight loan, so it costs more than the repo,
\[ \text{MSF}>\text{Repo} \]

Step 4: Line them up.
Putting the two together,
\[ \text{MSF}>\text{Repo}>\text{Reverse Repo} \]
\[ \boxed{\text{MSF rate}>\text{Repo rate}>\text{Reverse Repo rate}} \]