Liquidity Adjustment Facility (LAF)


Liquidity adjustment facility (LAF) is a monetary policy tool which allows banks to borrow money through repurchase agreements.

Liquidity Adjustment Facility (LAF) was introduced for the first time in June 2000.

It was introduced on the recommendation of Narsimhan Committee.

LAF has two components: [1] Repo Rate [2] Reverse Repo Rate

[1] Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds.

Banks borrow money from the RBI by selling their surplus government securities to RBI.

Repo Rate injects liquidity into the system.

[2] Under Reverse Repo, RBI borrows money from banks by lending securities.

Reverse Repo Rate absorbs liquidity from the system.

Repos and reverse repos will be undertaken in all transferable dated Government of India Securities/Treasury Bills (except 14 days treasury bills).

 

RBI conducts the Repo auctions and Reverse Repo auctions on daily basis from Monday to Friday except holidays.

The Repo tenor will be seven days. In case the seventh day after the repo date falls on a holiday, the reversal date will be the immediate preceding working day.

In order to provide for any requirement arising out of unexpected temporary shortages of funds, the tenor of reverse repos under LAF will continue to be overnight.

 

Eligibility—

All Scheduled Commercial Banks (excluding Regional Rural Banks) and Primary Dealers (PDs) having Current Account and SGL Account with Reserve Bank, Mumbai will be eligible to participate in the Repo and Reverse Repo auctions.

Bank cannot sell Government securities to RBI that is part of bank’s SLR (Statutory Liquidity Ratio) quota.

Minimum bid size—

Bids will be received for a minimum amount of Rs.5 crore and in multiples of Rs. 5 crore thereafter.