The Reserve Bank has opened up a special facility to help banks get more cash when they are squeezed for liquid funds, easing a pressure point for banks that borrow from each other in times of crunch in the inter-bank funds market, called the call money market.
The Marginal Standing Facility (MSF) cushion, which is expected to ease volatility in the call money market, is an accessory measure of the single policy rate that the RBI ushered in on Tuesday.
Along with an increase in the savings bank interest rate and a broadening of priority sector bank loans to include credit to micro-finance institutions, these measures gave the policy review the appearance of a mini-reform package.
The MSF funds will be made available to banks at one percentage point above the repo, the rate at which RBI lends to banks.
"While it has taken steps to deepen the bond markets, RBI has created the MSF which will be very important for inter-bank rate volatility," said Nilesh Shah, president, strategic initiatives, Axis Bank.
Ashvin Parekh, national head, financial services at Ernst & Young, said the MSF will provide a "moderation buffer" so that overnight call money rates do not heat up.