Liquidity Adjustment Facility

The Liquidity Adjustment Facility (LAF) is a tool used by the Reserve Bank of India (RBI) to manage liquidity in the banking system. It is a repo-based facility, under which the RBI provides liquidity to banks against eligible securities. The LAF is used to:

* Inject liquidity into the system when there is a shortage of funds, and
* Withdraw liquidity from the system when there is an excess of funds.

The LAF is an important tool for the RBI to manage liquidity and ensure the smooth functioning of the financial system.

The LAF is a standing facility, which means that it is always available to banks. The RBI sets the repo rate, which is the interest rate at which it lends money to banks under the LAF. The repo rate is an important monetary policy tool, and it is used by the RBI to influence the overall level of interest rates in the economy.

The LAF is used by banks to manage their liquidity needs. Banks can borrow money from the RBI under the LAF when they need to meet their short-term liquidity requirements. The LAF is also used by banks to adjust their balance sheets. Banks can sell securities to the RBI under the LAF when they want to reduce their assets, and they can buy securities from the RBI under the LAF when they want to increase their assets.

The LAF is an important tool for the RBI to manage liquidity and ensure the smooth functioning of the financial system. The LAF is used by banks to manage their liquidity needs, and it is also used by the RBI to influence the overall level of interest rates in the economy.