3/23/2017 LiquidityAdjustmentFacility(LAF)Arthapedia

LiquidityAdjustmentFacility(LAF)
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LAFisafacilityextendedbytheReserveBankofIndiatothescheduledcommercialbanks(excludingRRBs)
andprimarydealerstoavailofliquidityincaseofrequirementorparkexcessfundswiththeRBIincaseof
excessliquidityonanovernightbasisagainstthecollateralofGovernmentsecuritiesincludingState
Governmentsecurities.BasicallyLAFenablesliquiditymanagementonadaytodaybasis.

Liquidityadjustmentfacility(LAF)isamonetarypolicytoolwhichallowsbankstoborrowmoneythrough
repurchaseagreementsorrepos.LAFisusedtoaidbanksinadjustingthedaytodaymismatchesinliquidity
(frictionalliquiditydeficit/surplus).Liquidityofamoredurablenaturearemanagedwithotherinstruments
like,cashreserveratio(CRR)(http://www.arthapedia.in/index.php?title=Cash_Reserve_Ratio_(CRR))or
MarketStabilizationScheme(MSS)(http://arthapedia.in/index.php?
title=Market_Stabilization_Scheme_(MSS)).

TheoperationsofLAFareconductedbywayofrepurchaseagreements(reposandreverserepos)withRBI
beingthecounterpartytoallthetransactions.Repoorrepurchaseoptionisacollaterisedlendingi.e.banks
borrowmoneyfromReservebankofIndiatomeetshorttermneedsbysellingsecuritiestoRBIwithan
agreementtorepurchasethesameatpredeterminedrateanddate.TheratechargedbyRBIforthistransaction
iscalledthereporate.Repooperationsthereforeinjectliquidityintothesystem.Reverserepooperationis
whenRBIborrowsmoneyfrombanksbylendingsecurities.TheinterestratepaidbyRBIisinthiscaseis
calledthereversereporate.Reverserepooperationthereforeabsorbstheliquidityinthesystem.

ThecollateralusedforrepoandreverserepooperationscompriseofprimarilyGovernmentofIndiasecurities.
Infact,ReverseReposandReposcanbeundertakeninallSLReligibletransferableGovernmentofIndiadated
Securities/TreasuryBills.OilbondshavebeenalsosuggestedtobeincludedascollateralforLiquidity
adjustmentfacility.

ThroughLAF,banksarepermittedtoborrowonlyacertainpercentageofitsNetDemandandTimeLiabilities
(NDTL).IncasetheBankrequiresmorefunds,beyondwhatispermissibleunderLAF,itcanaccessanother
windowcalledMarginalStandingFacility(MSF)(http://www.arthapedia.in/index.php?
title=Marginal_Standing_Facility)

IntheLAFforovernightdrawings,boththereverserepoandrepooperationsareconductedatafixedrate.
TheseratesarechangedonlythroughtheannouncementsmadeduringtheMonetaryPolicyStatementsofthe
RBI.

SinceOctober2013(https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8501&Mode=0),theReserve
BankhasintroducedTermRepo(reposofdurationmorethanaday)undertheLiquidityAdjustmentFacility
(LAF)for14daysand7daystenorsforbanks(scheduledcommercialbanksotherthanRRBs)inadditionto
theexistingdailyLAF(repoandreverserepo)andMSF.Theaimoftermrepoistohelpdevelopinterbank
moneymarket,whichinturncansetmarketbasedbenchmarksforpricingofloansanddeposits,andthrough
thatimprovetransmissionofmonetarypolicy.Thus,atpresent,theobjectiveofmeetingshorttermliquidity
needsisbeingaccomplishedthroughtheprovisionofliquiditybytheReserveBankunderitsregularfacilities
variablerate14day/7dayrepoauctionsequivalentto0.75percentofbankingsystemNDTL,supplemented
bydailyovernightfixedraterepos(atthereporate)equivalentto0.25percentofbankwiseNDTL.Frictional
andseasonalmismatchesthatmovethesystemawayfromnormalliquidityprovisionareaddressedthrough
finetuningoperations,includingvariableraterepo/reverserepoauctionsofvaryingtenors.

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3/23/2017 LiquidityAdjustmentFacility(LAF)Arthapedia

LAFisconductedatafixedtimeonadailybasisonallworkingdaysinMumbai(excludingSaturdays).While
theLAFRepooperationsareconductedintheforenoonbetween9.30A.M.and10.30A.M.,theLAFReverse
Repooperationsareconductedintheafternoonbetween4.45pmand5.15pm(earlieritusedtobeheldat4.30
P.M.to5.00P.M.uptillJuly2012,alongwiththeMarginalStandingFacility
(http://www.arthapedia.in/index.php?title=Marginal_Standing_Facility)However,MSFwindownowoperates
from7.00PMto7.30PM).AlsoanadditionalRepounderLAF(SecondLAFRepo)isbeingconductedon
reportingFridays,witheffectfromFebruary10,2012.Thisisalsoconductedbetween4.45pmand5.15pm.At
times,RBIconductsSpecialRepowindowfacilityforanotifiedamountforspecificperiodstomeetemergency
situations.(Foreg.inJuly2013(https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=8247&Mode=0)a
specialwindowforanamountofRs.25,000crorewasopenedwithaviewtoenablingbankstomeetthe
liquidityrequirementofmutualfunds)

Whilethe14daytermrepooftenorwouldbeconductedeveryreportingFriday,the7daytermrepowouldbe
conductedoneverynonreportingFriday.Incasethenotifiedamountforthe14daytermrepoisnotfully
subscribed,a7daytermrepowouldbeconductedonthefollowingFridayfortheremainingunsubscribed
amount.Incaseoffullsubscriptioninthe14daytermrepo,therewillbeno7daytermrepoauctiononthe
followingFriday.

Liquidityadjustmentfacilityhasemergedastheprincipaloperatinginstrumentformodulatingshortterm
liquidityintheeconomy.Reporatehasbecomethekeypolicyratewhichsignalsthemonetarypolicystanceof
theeconomy.

WitheffectfromNovember28,2014,LiquidityAdjustmentFacility(LAF)isbeingextendedtoScheduled
UrbanCooperativeBanks(UCBs)whichareCoreBankingSystem(CBS)enabled,haveCRARofatleast9
percentandarefullycompliantwiththeeligibilitycriteriaprescribedforLAF.

TheintroductionofLiquidityadjustmentfacilityinIndiawasonthebasisoftherecommendationsof
Narsimhamcommitteeonbankingsectorreforms.InApril1999,aninterimLAFwasintroducedtoprovidea
ceilingandthefixedratereposwerecontinuedtoprovideafloorformoneymarketrates.Asperthepolicy
measuresannouncedin2000,theLiquidityAdjustmentFacilitywasintroducedwiththefirststagestarting
fromJune2000onwards.Subsequentrevisionsweremadein2001and2004.Whentheschemewas
introduced,repoauctionsweredescribedforoperationswhichabsorbedliquidityfromthesystemandreverse
repoactionsforoperationswhichinjectedliquidityintothesystem.Howeverininternationalnomenclature,
repoandreverserepoimpliedthereverse.HenceinOctober2004
(https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=1991&Mode=0)whenrevisedschemeofLAFwas
announced,thedecisiontofollowtheinternationalusageoftermswasadopted.

Repoandreversereporateswereannouncedseparatelytillthemonetarypolicystatementin3.5.2011.Inthis
monetarypolicystatement,ithasbeendecidedthatthereversereporatewouldnotbeannouncedseparatelybut
willbelinkedtoreporate.Thereversereporatewillbe100basispointsbelowreporate.Theliquidity
adjustmentfacilitycorridor,thatistheexcessofreporateoverreverserepo,hasvariedbetween100to300
basispoints.TheperiodbetweenApril2001toMarch2004andJune2008toearlyNovember2008sawa
broadercorridorrangingfrom150250and200300basispointsrespectively.DuringMarch2004toJune2008
thecorridorwasnarrowwiththeratesrangingfrom100175basispoints.AnarrowLAFcorridorisreflected
fromNovember2008onwards.Atpresentthewidthofthecorridoris100basispoints.Thiscorridorisusedto
containanyvolatilityinshortterminterestrates.

AlsoSee
StatutoryLiquidityRatio(SLR)(http://www.arthapedia.in/index.php?title=Statutory_Liquidity_Ratio)
cashreserveratio(CRR)(http://www.arthapedia.in/index.php?title=Cash_Reserve_Ratio_(CRR))
MarginalStandingFacility(MSF)(http://www.arthapedia.in/index.php?
title=Marginal_Standing_Facility)
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BaseRate(http://arthapedia.in/index.php?title=Base_Rate)
MarketStabilizationScheme(MSS)(http://arthapedia.in/index.php?
title=Market_Stabilization_Scheme_(MSS))
PolicyRate(http://arthapedia.in/index.php?title=Policy_Rate)
BankRate(http://arthapedia.in/index.php?title=Bank_Rate)
InterestRateCorridor(http://arthapedia.in/index.php?title=Interest_rate_corridor)
RepoandReverseRepoRate(http://arthapedia.in/index.php?title=Repo_Rate_and_Reverse_Repo_Rate)

References
1.http://www.rbi.org.in/

Contributedby
GayatriNair,IES(2004)(http://www.ies.gov.in/myaccountprofileview.php?memid=316)
Emailgayatrinair25@gmail.com(mailto:gayatrinair25@gmail.com)

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