RBI’s MSF Window Sees Action—Banks Borrow Big While Sitting on Bigger Cash

A fresh set of liquidity data released by the Reserve Bank of India (RBI) reveals a curious divergence in the banking system: while aggregate cash balances remain elevated, banks are increasingly tapping into the Marginal Standing Facility (MSF) for emergency funds. This trend, observed between September 6 and 8, points to asymmetric liquidity conditions and short-term mismatches in fund availability across the sector.

 

According to RBI disclosures, banks held ₹9.56 trillion in cash balances on September 6, which dipped slightly to ₹9.54 trillion on September 7 and further to ₹9.29 trillion on September 8. Despite these substantial reserves—well above the average daily Cash Reserve Requirement (CRR) of ₹9.04 trillion for the fortnight ending September 19—banks borrowed ₹4.97 billion, ₹8.24 billion, and a staggering ₹120.69 billion via the MSF on those respective days.

 

Understanding the Marginal Standing Facility Surge

The MSF is a window through which scheduled commercial banks can borrow overnight funds from the RBI at a rate higher than the repo rate, typically used during acute liquidity shortages. The spike in MSF borrowing on September 8—over ₹120 billion—marks a sharp deviation from the previous two days and suggests that certain banks faced unexpected shortfalls in reserve maintenance or payment obligations.

 

This borrowing surge, juxtaposed against high system-wide cash balances, underscores a growing liquidity asymmetry. In simpler terms, while the banking system as a whole may appear flush with funds, individual banks may be experiencing localized stress due to uneven fund distribution, timing mismatches, or precautionary hoarding.

 

Liquidity Distribution: A Growing Concern

The RBI has previously flagged this phenomenon in its April 2025 bulletin, noting that high balances under the Standing Deposit Facility (SDF) and MSF reflect precautionary behavior and uneven liquidity access across banks. The coexistence of surplus and deficit conditions within the same system points to structural inefficiencies in interbank fund flows and reserve management.

 

Experts suggest that the shift toward 24x7 payment systems and “just-in-time” treasury operations has reduced float money and increased the need for real-time liquidity buffers. As a result, banks are more likely to hold excess reserves or resort to MSF borrowing to avoid penalties for CRR shortfalls.

 

Cash Reserve Requirement and Systemic Trends

The RBI’s data also confirms that the average daily CRR requirement for the two-week period ending September 19 stands at ₹9.04 trillion. This benchmark helps contextualize the daily cash balances reported by banks, which have consistently remained above this threshold. However, the elevated MSF usage suggests that meeting CRR targets is not just about aggregate balances but also about timing, distribution, and operational agility.

 

The RBI’s liquidity management framework, which includes tools like the MSF, SDF, and Variable Rate Reverse Repo (VRRR), is designed to absorb or inject liquidity based on evolving market conditions. The recent MSF spike may prompt the central bank to reassess its liquidity calibration or issue further guidance to banks on reserve planning.

 

Implications for Monetary Policy and Market Sentiment

While the RBI has maintained a cautious stance on interest rates amid inflationary pressures, liquidity trends like these could influence future policy decisions. A persistent rise in MSF borrowing may signal underlying stress that warrants intervention, either through targeted liquidity infusions or regulatory adjustments.

 

For market participants, these developments offer insights into the health of the banking system and the effectiveness of RBI’s liquidity tools. Investors and analysts will be watching closely for any follow-up commentary from the central bank, especially in the upcoming monetary policy review.

 

Sources: RBI’s official data releases, Business Standard, PIB