Consider the following statements: Statement I: The Marginal Standing Facility (MSF) provides a safety valve against unexpected liquidity shocks to the banking system. Statement II: Under the MSF, banks can borrow overnight funds from the RBI by pledging government securities, even below the Statutory Liquidity Ratio (SLR) threshold. Which one of the following is correct? |ForumIAS

[A] Both Statement I and Statement II are correct, and Statement II is the correct explanation of Statement I.

[B] Both Statement I and Statement II are correct, but Statement II is not the correct explanation of Statement I.

[C] Statement I is correct, but Statement II is incorrect.

[D] Statement I is incorrect, but Statement II is correct.

Answer: A

Notes:

Explanation:

MSF is specifically designed as a safety valve to address unexpected liquidity shortfalls in the banking system.
Under MSF, banks can borrow overnight by pledging securities even by dipping into their SLR holdings (within a limit of 1% of NDTL), which they are otherwise required to maintain — this unique feature allows flexibility in emergency situations.

Source: Indian Economy (Ramesh Singh)