BANKING AFFAIRS

Detailed explanation-1: -A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI) that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.

Detailed explanation-2: -What is Liquidity Adjustment Facility (LAF)? A LAF is a monetary policy tool used in India by the RBI through which it injects or absorbs liquidity into or from the banking system. It was introduced as a part of the outcome of the Narasimham Committee on Banking Sector Reforms of 1998.

Detailed explanation-3: -They are also eligible as collaterals for borrowing through market repo as well as borrowing by eligible entities from the RBI under the Liquidity Adjustment Facility (LAF) and special repo conducted under market repo by CCIL.

Detailed explanation-4: -Using repo, banks raise the necessary capital to increase their lending capacity. This ensures liquidity for the bank and proper cash flow into the market. But, in the case of inflation, RBI uses reverse repo to absorb funds from the market to regulate the lending capabilities of commercial banks.

Detailed explanation-5: -This provides a safety valve against unanticipated liquidity shocks to the banking system. The MSF rate is placed at 25 basis points above the policy repo rate. Liquidity Adjustment Facility (LAF): The LAF refers to the Reserve Bank’s operations through which it injects/absorbs liquidity into/from the banking system.