1. ‘Liquidity Adjustment Facility (LAF)’ stands for variable (or fixed) rate Repo operations (for injection of liquidity) and reverse repo operations (for absorption of liquidity) conducted by RBI from time to time
### April 1999
1. On [April 20, 1999](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=2263#:~:text=Rs.3%2C250%20crore.-,Interim%20Liquidity%20Adjustment%20Facility,-41.%C2%A0%C2%A0%C2%A0%20In%20the), in the Monetary and Credit Policy for the Year 1999-2000 , RBI introduced the **interim liquidity adjustment facility-ILAF**, after agreeing with the [Committee on Banking Sector Reforms (Narasimham Committee – II) (1998)](RBI_Group-Committee_19980422_Report%20of%20the%20Committee%20on%20Banking%20Sector%20Reforms-Narasimham%20Committee%20–%20II%20(1998).pdf) suggestion, to manage liquidity injection and absorption by 2 [[Money Market Operations (MMO)|operations]] or instruments, viz. Repo (repurchase agreements) and reverse repo respectively.
2. The aim was to move the [[#^fb61a9|liquidity management operations]] of the RBI away from direct instruments to indirect market-based instruments.
1. In the link above, repos stands for absorption and reverse repos for lending.
2. Liquidity was injected against collateral of GoI securities at *various interest rates*, but surplus liquidity was absorbed at a fixed rate.
3. For liquidity injection, a Collateralised Lending Facility (CLF), Additional Collateralised Lending Facility (ACLF), Export credit refinance and liquidity support to PDs linked to the [[Bank Rate]] were established.
4. Both CLF and ACLF were for a fortnight.
5. Thus LAF allowed scheduled commercial banks and primary dealers *to borrow or lend from the RBI* against the collateral of government securities.
6. Absorption of liquidity in the market will continue to be through fixed rate repos.|
7. It was [envisaged](https://rbi.org.in/Upload/Notification/Pdfs/39908.pdf) that the LAF would help the short-term money market interest rates to move within a corridor and impart stability, facilitating emergence of a short-term rupee yield curve.
8. Also, the liquidity management operations of the RBI began to move away from direct instruments to indirect market-based instruments.
<span style="background-color:#ffffe5;">A note on [Introduction of LAF](Bank%20Rate.md#Introduction%20of%20LAF) - From April, 1999 to March 2004.</span>
## May 2000
1. The monetary policy Statement of April 2000 [^8] announced the introduction of LAF.
2. It was operationalised on [5-June 2000](https://rbi.org.in/scripts/NotificationUser.aspx?Id=188&Mode=0), and the details of scheme was announced on 29-May-2000. This was the first stage of the LAF.
1. It was available only for scheduled commercial banks (excluding RRBs) and Primary Dealers.
2. Additional Collaterialised Lending Facility (ACLF) for banks was withdrawn.
3. Refinance/reverse repos under Level II for PDs was withdrawn.
4. ERF (Export Refinance Facility) and Collateralised Lending Facility (CLF) at Bank Rate continued as per the existing procedure.
5. **Auctions:**
1. Daily Basis except Saturdays - Variable Rate Repo auctions (for absorption of liquidity) and (ii) Variable Rate reverse repo auctions (for injection of liquidity). Fixed rate repos (absorption) was removed.
2. Before Oct 29, 2004:
1. **Repo Rate**: The (fixed) interest rate at which the Reserve Bank absorbs liquidity, on an overnight basis, from banks against the collateral of eligible government securities under the LAF.
2. **Reverse Repo Rate:** The (fixed) interest rate at which the Reserve Bank provides overnight liquidity to banks against the collateral of government and other approved securities under the LAF. It is the policy rate decided by the Monetary Policy Committee (MPC).
3. Tenor: 1 day except on days before the intervening holidays. On Fridays, the auctions will be held for three days maturity to cover the following Saturday and Sunday.
4. Minimum bid size was set to Rs 10 crore.
5. Auction type was "uniform" price auction
6. The existing Fixed Rate Repo (absorption) was discontinued, and replaced with variable rate repo auction. The Fixed repo rate auctions, were [introduced](https://www.indiabudget.gov.in/budget_archive/es97-98/chap414.pdf) in November 1997.[^7]
7. Timings: Before 11.00 a.m. on week days except Saturdays, and auction results will be displayed by Mumbai Office by 1.00 p.m.
8. The scheme was revised in 2001 and 2004, and in subsequent years.
9. Before LAF, bank rate was major policy rate.
## May 2001
1. On [May 3, 2001](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=4989), effective from May 8, 2001, some changes in the operating procedures of LAF were announced.
2. It was first announced in Monetary and Credit policy 2001-2002 in April 2001.
**Auctions:**
1. ==Daily, except Saturdays, 1-day variable rate repo/reverse repo variable rate auctions==
1. Tenor: 1 day except when there are intervening holidays. On Fridays the repo will be done for three days to cover the following Saturday and Sunday
2. Absorption:
2. 1-day fixed rate repo would be *sparingly used.*
3. Up to 14 days, viz. longer-term, repos *as and when required*.
3. Min. Bid size was reduced from 10 crore to 5 crore.
4. Auction method was LAF was changed to the multiple price auction.
5. Timings were advanced by 30 mins.
3. [June 4, 2001](RBI_Press%20Release_20010604_Multiple%20Price%20Method%20for%20LAF%20Auctions%20to%20continue.pdf) - Multiple Price Method for LAF Auctions to continue
4. The rates arising out of daily repo and reverse repo auctions imparted an informal corridor to movement of call/notice money rates. Thus LAF as a liquidity management tool has achieved one of the basic monetary policy objectives of stabilising the short-term interest rates. [^2]
## 2003
1. Dec 2003 - Report of the [Internal Group on Liquidity Adjustment Facility](RBI_Group-Committee_20031202_Report%20of%20the%20Internal%20Group%20on%20Liquidity%20Adjustment%20Facility.pdf) was published.
1. [Box VIII.2 - Internal Group on Liquidity Adjustment Facility](RBI_Annual%20Report_2004.pdf#page=133&selection=60,0,61,47) in RBI's Annual Report-2004
2. [Box 3.2 Internal Group on Liquidity Adjustment Facility (2003)](RBI_History%20of%20The%20Reserve%20Bank%20of%20India%20(1997-2008)_Volume%20V.pdf#page=89&selection=3,0,5,58) in History of The Reserve Bank of India (1997-2008)-Volume V
## 2004
### March 2004
1. Based on the '[Report of the Internal Group on Liquidity Adjustment Facility'](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4960) released on 13-Jan-2004, a revised LAF scheme was introduced on 29-March-2004.
2. It is to be noted that the report has old usage of terms repo and reverse repo.
1. The group observed few issues like the dual role of the bank rate and the reverse repo rate (lending) as the signalling rate, with more acceptance by the markets of the reverse repo rate ((lending) as the signalling rate, and the 'bottom' position of the reverse repo rate in the corridor due to 'passive' sterilization of excess domestic liquidity emanating from capital flows at the reverse repo rate. It is to be noted, for the purpose of clarity, that ['reverse repo rate' (current/international usage) was the policy rate](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631#:~:text=Appendix%20Table%20AT%2D3%3A%20Duration%20of%20Width%20of%20Corridor%20in%20India) for most of the time between 2001 and 2006.
2. ==Based on the suggestions, following changes were [announced](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1549) on March 25, 2004:==
1. The daily 1-day variable rate repo/reverse repo variable rate auctions were ended, and replaced with:
2. Absorption:
1. Daily 7-day fixed rate repo (these fixed rate repos thus get re-introduced in April 2004, after November 1997)
2. 14-day variable conducted on a fortnightly interval (held on Mondays)
3. Lending:
2. Daily 1-day fixed reverse repo
4. Thus, LAF system which was operating on 'auction-based variable rate' during the period from April 27, 2001 to March 28, 2004, moved to *almost* a 'fixed rate' mode from March 29, 2004.
3. The group also recommended the Market Stabilisation Scheme ([[Market Stabilisation Scheme (MSS), 2004|MSS]]), which was also introduced in April 2004.
4. Wit rates arising out of daily repo and reverse repo auctions have imparted an informal corridor to movement of call/notice money rates (Chart 1). Thus, LAF as a liquidity management tool has achieved one of the basic monetary policy objectives of stabilising the short-term interest rates.
### April 2004
1. Absorption-The above fixed rate repo auctions were re-introduced, as they were initially [introduced](https://rbi.org.in/history/Brief_Chro1991to2000.html) on Nov 28, 1997 [^5]
### August 2004
1. Effective from August 16, 2004, and announced on [August 13, 2004](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=10480), the *daily 1-day fixed rate repo* was introduced again, and LAF was conducted as follows:
2. Absorption:
1. Daily *1-day fixed rate repo*
2. Daily 7-day fixed rate repo
3. 14-day variable conducted on a fortnightly interval (held on Mondays).
3. Lending:
1. Daily 1-day fixed reverse repo
4. Example: [Results](https://website.rbi.org.in/web/rbi/-/press-releases/liquidity-adjustment-facility-auction-results-10523?p_l_back_url=%2Fweb%2Frbi%2Fsearch%3Fq%3DLiquidity%2520Adjustment%2520Facility%2520%253A%2520Auction%2520Result%26type%3Dcom.liferay.journal.model.JournalArticle%26type%3Dcom.liferay.portal.kernel.model.Layout%26togs%3Dexact%26orderBy%3Doldest%26delta%3D10%26start%3D104) of the RBI Repo/Reverse Repo auctions held on August 19, 2004
### October 2004
>1. [Sept 30, 2004](RBI_Notification_20040930_Liquidity%20Adjustment%20Facility%20-%20International%20Usage%20of%20terms%20'Repo'%20and%20Reverse%20Repo'.pdf) - RBI proposed to switchover to the international usage of the terms "Repo" and "Reverse Repo" with effect from **October 29, 2004**
>2. [Oct 26, 2004](RBI_Notification_20041026_Revised%20Liquidity%20Adjustment%20Facility.pdf) - RBI announced Revised Liquidity Adjustment Facility
>3. [Oct 27, 2004](RBI_Notification_20041027_Liquidity%20Adjustment%20Facility%20–%20Revised%20Scheme.pdf) - RBI announced Revised Liquidity Adjustment Facility
> 1. Effective Oct 29, 2004, RBI adopted the international usage of the terms 'repo' and 'reverse repo'. *Before the change, the usage of term 'repo' meant borrowing from banks and reverse repo meant lending to banks in India, which was contrary to the international usage.
> 2. From here, repo stands for lending and reverse repo is absorption of liquidity.
>
### November, 2004
1. ==From [November 1, 2004](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=1938), the LAF scheme was operated only through overnight fixed rate repos and reverse repos==, as the 7-day and 14-day repo (now called reverse repos) were discontinued.
1. Lending:
1. Daily 1-day fixed repo
2. Absorption:
1. Daily 1-day fixed rate reverse repo
2. Even there was no formal targeting of overnight interest rates at that time, *LAF operation has enabled the RBI to de-emphasize the targeting of bank reserves and focus increasingly on interest rates. It helped to manage 'short-term liquidity' ensure 'stable conditions' in the overnight (call) money market.*
3. RBI provided unlimited accommodation of liquidity needs at the fixed repo rate.
4. LAF also [replaced](https://www.rbi.org.in/Upload/AnnualReport/Pdfs/56242.pdf) OMO in G-secs as tool to manage liquidity.
5. <span style="background-color:#ffffe5;">It became the principal instrument of liquidity management or the principal operating instrument of monetary policy.</span>
## 2005
1. [November 25, 2005](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=13923)- Effective from November 28, 2005, RBI introduce Second LAF
2. It gave another opportunity to market participants to fine-tune their liquidity management.
3. Second LAF (SLAF) was introduced on a daily basis, where bids were received between 3.00 p.m. and 3.45 p.m. This was in addition to the first LAF, which was conducted forenoon between 9.30 a.m. and 10.30 a.m.
### SLAF
Here's a timeline of changes in SLAF:
1. [Nov 25, 2005](RBI_Notification_20051125_Second%20Liquidity%20Adjustment%20Facility.pdf) - Effective from Nov 28, 2005, the Second LAF (SLAF) introduced, and was conducted between 3.00-3.45 pm on a daily basis.
2. [July 31, 2007](RBI_Notification_20070731_Liquidity%20Adjustment%20Facility.pdf) - It was withdrawn with effect from August 6, 2007.
3. [July 31, 2008](RBI_Notification_20080731_SECOND%20Liquidity%20Adjustment%20Facility%20on%20Reporting%20Fridays.pdf) - It was re-introduced on August 1, 2008 on reporting Fridays
4. [Sept 16, 2008](RBI_Press%20Release_20080916_RBI%20Announces%20Market%20Measures.pdf) - It was conducted on a daily basis with effect from September 17, 2008 to May 5, 2009.
5. May 6, 2009 - It was announced to conduct the Second LAF (SLAF) only on reporting Fridays effective from May 8, 2009.
6. [May 26, 2010](RBI_Press%20Release_20100526_RBI%20Announces%20Liquidity%20Easing%20Measures.pdf) - Daily SLAF was again introduced from May 28, 2010 to July 2, 2010.
7. [July 16, 2010](RBI_Press%20Release_20100716_Reserve%20Bank%20extends%20Second%20LAF%20(SLAF)%20on%20a%20Daily%20Basis.pdf) - Daily SLF was extended till July 30, 2010.
8. July 30, 2010 - SLAF was held on reporting Fridays
9. [Oct 29, 2020](RBI_Press%20Release_20101029_RBI%20announces%20Liquidity%20Easing%20Measures.pdf) - Special Second LAF was to be conducted on October 29 and November 1, 2010
10. [Oct 31, 2010](RBI_Press%20Release_20101031_RBI%20extends%20Liquidity%20Easing%20Measures.pdf) - Special SLAF was conducted daily on all days during [November 1-4, 2010](RBI_Notification_20101101_Liquidity%20Adjustment%20Facility%20–%20Liquidity%20Easing%20Measures.pdf).
11. [November 9, 2010](RBI_Press%20Release_20101109_RBI%20re-introduces%20Liquidity%20Easing%20Measures.pdf) - Daily SLAF was re-introduced till December 16, 2010.
12. [November 30, 2010](RBI_Notification_20101130_Liquidity%20Adjustment%20Facility%20–%20Liquidity%20Easing%20Measure.pdf) - Daily SLAF was extended to January 28, 2011.
13. [January 25, 2011](RBI_MPS_201101_Q3.pdf) - Daily SLAF extended till April 8, 2011.
14. [April 8, 2011](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24202) - Daily SLAF was again extended till May 6, 2011.
15. [Jan 27, 2012](RBI_Notification_20120127_Additional%20Repo%20Operations%20under%20Liquidity%20Adjustment%20Facility%20(LAF)%20on%20Reporting%20Fridays.pdf) - RBI re-introduced additional Repo under LAF (Second LAF Repo) between 4.30 P.M. and 5.00 P.M. on reporting Fridays, with effect from February 10, 2012, till further notice.
## 2006
1. [Feb 10, 2006](RBI_Notification_20060210_Liquidity%20Adjustment%20Facility%20–%20Modifications.pdf) - Modifications to the Liquidity Adjustment Facility were issued.
2. [April 18, 2006](RBI_MPS_20060418_Annual%20Policy%20Statement%20for%202006-07.pdf) - the State Development Loans (SDLs) were made eligible securities under the LAF-Repos with effect from April 3, 2007.
## 2007
1. [March 2, 2007](RBI_Notification_20070731_Liquidity%20Adjustment%20Facility.pdf) - RBI imposed a limit of Rs.3,000 crore each day, comprising Rs.2,000 crore in the First LAF and Rs. 1,000 crore in the Second LAF in daily reverse repo absorptions
1. It was revoked on [July 31, 2007](RBI_Notification_20070731_Liquidity%20Adjustment%20Facility.pdf), along with Second LAF (SLAF).
2. [March 30, 2007](RBI_Notification_20070330_Liquidity%20Adjustment%20Facility%20–%20Acceptance%20of%20State%20Development%20Loans%20under%20Repos.pdf) - RBI issued guidelines on acceptance of SDLs as eligible securities under the LAF
## 2008
1. [Sept 16, 2008](RBI_Notification_20080916_Section%2024%20of%20the%20Banking%20Regulation%20Act,%201949%20–%20Shortfall%20in%20Maintenance%20of%20Statutory%20Liquidity%20Ratio%20(SLR)%20–%20Additional%20Liquidity%20support%20under%20Liquidity%20Adjustment%20Facility%20(LAF).pdf) - scheduled banks were allowed to borrow under the LAF to the extent of up to 1% of their NDTL as a carve-out from their SLR requirement.
2. Special term repo facility (*against a carve-out from mandatory SLR*) for banks to lend to mutual funds
1. [Oct 14, 2008](RBI_Notification_20081014_Special%20Fixed%20Rate%20Repo%20under%20Liquidity%20Adjustment%20Facility.pdf) - In addition to auctions conducted under LAF and Second LAF (SLAF), RBI announced a special fixed rate repo at 9 per cent per annum against eligible securities for a notified amount of Rs.20,000 crore on the same day, with a view to enabling banks to borrow up to **1% of their NDTL** to meet the liquidity requirements of Mutual Funds. The reversal shall take place on Wednesday, October 29, 2008.
2. [Oct 15, 2008](RBI_Notification_20081015_Maintenance%20of%20Statutory%20Liquidity%20Ratio%20(SLR)%20-%20Additional%20Liquidity%20Support%20under%20Liquidity%20Adjustment%20Facility%20(LAF).pdf) - In addition to the above, RBI offered banks additional liquidity support for 14 days (from the closure of the special term repo facility for mutual funds announced on October 14, 2008) exclusively for the purpose of meeting the liquidity requirements of mutual funds (and NBFCs) to the extent of up to **0.5% of NDTL.**
3. [Nov 3, 2008](RBI_Notification_20081103_%20Special%20Fixed%20Rate%20Repo%20Under%20Liquidity%20Adjustment%20Facility.pdf) - Extending the special term repo facility, RBI announced it would conduct the special fixed rate term repo of 14 days’ tenor under the LAF every day until further notice up to a _cumulative_ amount of Rs 60,000 crore on outstanding basis, allowing banks to avail liquidity support under the LAF at the extant repo rate through relaxation in the maintenance of SLR to the extent of up to 1.5% of their NDTL.
4. Nov 15, 2008 - It was [announced](RBI_Notification_20081117_Special%20Fixed%20Rate%20Repo%20Under%20Liquidity%20Adjustment%20Facility.pdf) that the special term repo facility will continue till end-March 2009
## 2010-2011
1. [May 26, 2010](RBI_Notification_20100526_Section%2024%20of%20the%20Banking%20Regulation%20Act,%201949%20–%20Shortfall%20in%20Maintenance%20of%20Statutory%20Liquidity%20Ratio%20(SLR)%20–%20Additional%20Liquidity%20support%20under%20Liquidity%20Adjustment%20Facility%20(LAF).pdf) - As a temporary measure, RBI allowed scheduled commercial banks to avail additional liquidity support under the LAF to the extent of up to 0.5 per cent of their NDTL as a carve-out from the SLR. So it was collateral free liquidity support
2. ==[July 2010](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=22884) - In the First Quarter Review of Monetary Policy for 2010-11, Dr. D. Subbarao, Governor, then governor of the Reserve Bank, proposed a working Group to Review the Operating Procedure of Monetary Policy, chaired by then Executive Director, Deepak Mohanty.==
1. Major Tasks/Terms of Reference of the Working Group:
1. review the current operating procedure of monetary policy in India, including liquidity adjustment facility (LAF), through which the central bank manages money supply in the system on a day-to-day basis.
2. survey the operating procedures of major central banks.
3. the role of [Bank Rate](Bank%20Rate.md), which was not been used since April 2003.
4. and [more](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631#:~:text=Terms%20of%20Reference%20of%20the%20Working%20Group)
2. Additional LAFs - collateral free up to 1-2% of NDTL
1. [Oct 29, 2010](RBI_Notification_20101029_RBI%20announces%20Liquidity%20Easing%20Measures.pdf) - a special 2-day repo auction under the LAF was announced in order to provide liquidity comfort arising out of frictional liquidity. Scheduled Commercial Banks (SCBs) were allowed to avail of additional liquidity support under the LAF to the extent of up to 1.0% of their net demand and time liabilities (NDTL) as on October 8, 2010.
1. For any [shortfall](RBI_Notification_20101029_Shortfall%20in%20Maintenance%20of%20SLR%20–%20Additional%20Liquidity%20support%20under%20LAF.pdf) in maintenance of SLR on October 30-31, 2010 arising out of availment of this facility, banks were provided waiver of penal interest purely as an _ad hoc,_ temporary measure. So indirectly it was collateral free.
2. [Nov 1, 2010](RBI_Notification_20101101_Shortfall%20in%20Maintenance%20of%20SLR%20–%20Additional%20Liquidity%20support%20under%20LAF.pdf) - Special repos were extended for November 1 - 4, 2010.
3. [Nov 09, 2010](RBI_Notification_20101109_Shortfall%20in%20Maintenance%20of%20SLR%20–%20Additional%20Liquidity%20support%20under%20LAF.pdf) - It was extended for the period November 9 – December 16, 2010
4. Nov 30, 2010 - It was extended till Jan 28, 2011, and banks could avail up to 2% of their NDTL on the reporting Friday of the second preceding fortnight with immediate effect up to January 28, 2011.
5. [Dec 16, 2010](RBI_Notification_20101216_Section%2024%20of%20Banking%20Regulation%20Act,%201949%20-%20Shortfall%20in%20Maintenance%20of%20Statutory%20Liquidity%20Ratio%20(SLR)%20–%20Additional%20Liquidity%20Support%20under%20Liquidity%20Adjustment%20Facility%20(LAF).pdf) - SLR was reduced by 1% of NDTL, so banks could now avail up to 1% of their NDTL on the reporting Friday of the second preceding fortnight, for the period between December 18, 2010 to January 28, 2011.
3. [March 11, 2011](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24063) - The Working group made several [recommendations](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631#:~:text=the%20following%20key-,recommendations,-%3A) in its report.
4. ==[May 3, 2011](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24335) - In the Monetary Policy Statement for 2011-12, based on the group's suggestions, **Dr. D. Subbarao, Governor** announced the [new changes](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24335#:~:text=Changes%20in%20Operating%20Procedure%20of%20Monetary%20Policy) in the operating procedure of monetary policy:
1. Repo rate was made the only one independently varying policy rate. This transition to a single independently varying policy rate was expected to more accurately signal the monetary policy stance.
1. From 2003 to 2-May-2011, monetary policy signals were provided through changes in both Repo and reverse Repo rates, that is the **policy rates shifted between repo and reverse repo rates**, depending upon the liquidity in the system and in conjunction with variations in the cash reserve ratio.
2. During episodes of excess liquidity (2001 through 2006 and again from 2008:Q4 to 2010:Q2), the reverse repo rate was the effective policy rate. [^10]
3. During episodes of monetary tightening/liquidity shortage (2007:Q1 to 2008:Q3 and 2010:Q3 to 2011:Q4), the repo rate became the effective policy rate.
4. While this helped to develop interest rate as an important instrument of monetary [[Monetary Policy Transmission OPEN]], this framework witnessed certain limitations due to the lack of a single policy rate and the absence of a firm corridor.
5. [Both or any one of the rates](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631#:~:text=Appendix%20Table%20AT%2D3%3A%20Duration%20of%20Width%20of%20Corridor%20in%20India) were changed along with the CRR depending on the liquidity, and hence there was no consistent single rate guiding expectations.
6. It introduced a new lending scheme [[Marginal Standing Facility (MSF), 2011|MSF]] as the upper bound of the corridor,
7. Reverse Repo:
1. The reverse repo rate was no longer an independent variable.
2. It is to be noted here that an uncollateralised deposit facility, viz. SDF facility, to help RBI absorb surplus liquidity was **not introduced** at that time as section 17(4) of the Reserve Bank of India Act, 1934, did not allow the central bank couldn't borrow without collaterals. The fixed reverse repo rate, with no restriction on amount, was made a dependent rate and was fixed at repo rate - 100 bps to act as floor for the corridor. It was only after the amendment to Section 17 of the RBI Act in 2018, [[Standing Deposit Facility (SDF), 2018|Standing Deposit Facility (SDF)]] was introduced on [8-April-2022](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=20931) , to allow RBI to absorb surplus cash without any collateral, and fixed rate reverse repo rate was replaced by SDF as the floor of the corridor.
8. Thus [[Marginal Standing Facility (MSF), 2011|MSF]] became the upper bound of the corridor, and fixed rate reverse repo as the floor.
9. [[The Reserve Bank of India/Bank Rate|Bank Rate]] was unchanged at 6%. After a period of 9 years, on [13-Feb-2012](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=25954), the Bank Rate was aligned with the MSF rate.
10. <span style="background-color:#ffffe5;">With this, managing the liquidity with the banking system (through LAF and other instruments) became the operating procedure of monetary policy; the weighted average call rate (WACR) the operating target, and the operating objective was to have a target for borrowed reserves (relative to NDTL of banks), and contain the call rate around the repo rate within the corridor.</span>
11. The operating framework was also premised on a target for borrowed reserves (relative to NDTL of banks)
2. With this, the framework aimed for transmission of changes in the repo rate through the weighted average call rate to the ultimate goals of monetary policy without any specific intermediate target.
5. This design of the corridor system, with repo rate as the policy rate, generally required the system liquidity to be in a small deficit of about 0.25 per cent - 0.5 per cent of NDTL of the banking system.
1. **What if the system turns into surplus mode?**
While the Group envisages the LAF to operate in a deficit mode for effective monetary transmission, but there could be events when the system could move into a surplus mode, like due to capital inflows. If capital inflows are far above the absorptive capacity of the economy and impart significant volatility to the exchange rate, the RBI could intervene in keeping with the stated objective of monetary policy. In order not to provide an incentive to banks to place their surplus funds in the LAF window of the RBI, the Working Group to Review the Operating Procedure of Monetary Policy recommended an asymmetric corridor with the spread between the policy repo rate and reverse repo rate twice as much as the spread between the policy repo rate and the Bank Rate (MSF rate). This would ensure that market participants have an incentive to deal among themselves before approaching the RBI.
2. But if the liquidity surplus/deficit persists beyond (+)/(-) one per cent of NDTL, the RBI should could use alternative instruments to supplement the LAF operations like CRR, OMOs and MSS.
6. **Width of the LAF Corridor:**
1. Between [Apr 27, 2001 and May 3, 2011](RBI_Group-Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf#page=15&selection=2,13,2,21), the interest rate corridor was not symmetrical, viz. the difference between repo rate (the ceiling) and reverse-repo rate (the floor) varied between 100 bps and 300 bps*. [^1]
2. [July 27, 2010](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=22884) - Narrowed from 150 bps to 125 bps
1. The repo rate was raised from 5.5 per cent to 5.75 per cent and the reverse repo rate from 4 per cent to 4.50 per cent.
2. This asymmetric raise in rates narrows the total width of the AF corridor from 150 bps to 125 bps.
3. The operation of the LAF during April 2001 to February 2011 indicates that the repo and reverse repo rates were changed either separately or together 39 times, leading to changes in the corridor width 26 times.
4. [May 3, 2011](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24335) - Widened from 125 bps to 200 (+/- 100) bps, making it symmetric around the repo rate.
1. ==The corridor was made symmetric in May 2011, with a fixed width of 200 bps between the ceiling of the corridor, i.e., MSF rate and the floor of the corridor, i.e., reverse-repo rate. Both were placed 100 bps above and below the repo rate, respectively.
2. But higher width also leads to more volatility in rates, and hence the width was reduced in later years.
3. ==Since May 2011, thus only repo rate has been changed, along with occasional changes in the width of the corridor.==
7. Also [[Cash Reserve Ratio (CRR)|Cash Reserve Ratio (CRR)]] was no longer the preferred liquidity management tool to control credit flow, and but changed only in conjunction with change in monetary policy stance.
8. Thus, along with the MSF and fixed rate reverse repo, the aim was to manage liquidity conditIons such that the WACR, uncollateralised overnight rate remains within the corridor.
9. ==A full accommodation of liquidity needs of banks but with a indicative comfort zone of the liquidity level of around (+)/(-) one per cent of net demand and time liabilities (NDTL), for optimal monetary transmission was another feature of this framework. Why?==
1. A simulation exercise carried out by the Group showed that at a liquidity deficit of one per cent of NDTL, the weighted average of money market rates exceeded the repo rate, on average, by around 15 bps.
2. Similarly, with a liquidity surplus of one per cent of NDTL, the weighted average of money market rates was lower by about 20 bps.
3. But when the liquidity deficit increased beyond one per cent of NDTL, the impact on the weighted average of money market rates was non-linear. For example, for a deficit at 1.25 per cent of NDTL, the deviation in weighted average of money market rates was 40 bps which rose to 75 bps for deficits at 1.5 per cent of NDTL and became unbounded at higher deficit levels.
10. The current operating framework was also premised on a target for borrowed reserves (relative to NDTL of banks).
11. **LAF:**
1. Lending:
1. Daily 1-day fixed rate repo
2. Absorption:
1. Daily 1-day fixed rate reverse repo
## 2013
#rupee
1. **15th July 2013**
1. The overall allocation of funds under the LAF was [limited to 1.0% of NDTL](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29086) of banking system to support rupee.
2. **July 23, 2013** ^0d90ad
1. As an additional [measure](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=29140) of monetary policy tightening to contain volatility in rupee, repo under LAF was further restricted to 0.5% of bank’s NDTL outstanding as on the last Friday of the second preceding fortnight, effect immediately, i.e., from July 24, 2013.
2. The minimum daily CRR balance maintenance was [increased](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=8263) to 99% from 70% owing to steep fall in rupee.
3. [July 23, 2013](RBI_Notification_20130723_Liquidity%20Adjustment%20Facility%20–%20Standalone%20Primary%20Dealers.pdf) - total amount of funds available to a standalone Primary Dealer (PD) under LAF was capped at 100 per cent of the individual PD’s net owned funds as per the latest audited balance sheet.
4. **Oct 8, 2013**
1. ==RBI announced variable rate [term repos](RBI_Notification_20131008_Term%20Repo%20under%20Liquidity%20Adjustment%20Facility.pdf) (7 and 14-day tenor) for the first time.==
2. While the 14 day term repo of tenor was conducted every reporting Friday, the 7 day term repo was conducted on every non-reporting Friday.
3. The total amount of liquidity injected through term repos was limited to 0.25 per cent of NDTL of the banking system.
4. As hitherto, daily LAF for individual banks was restricted to 0.5% of the bank's NDTL.
5. [Oct 29, 2013](RBI_Notification_20131029_Term%20Repo%20under%20Liquidity%20Adjustment%20Facility.pdf)
1. RBI decided to increase the quantum of liquidity to be provided through term repos of 7-day and 14-day tenor from the existing 0.25 per cent to 0.50 per cent of net demand and time liabilities (NDTL) of the banking system with immediate effect.
## 2014
1. [Jan 21, 2014](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30446)- The [Expert Committee](RBI_Group-Committee_2014_The%20Expert%20Committee%20to%20Revise%20and%20Strengthen%20the%20Monetary%20Policy%20Framework-2014_Chairman-Urijit%20R.%20Patel.pdf) to Revise and Strengthen the Monetary Policy Framework, chaired by Dr. Urjit Patel, during the tenure of [[Raghuram G. Rajan]], submitted its report.
1. It reviewed the multiple indicators approach and recommended that inflation, as measured by headline All India CPI-Combined (rural and urban), should be the nominal anchor for the monetary policy framework.
2. It suggest ways to make it more transparent and predictable.
3. An explicit glide path for disinflation was suggested, as a pre-condition for inflation targeting framework (which was adopted later).
4. It presented the [rationale](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=746) for the same, one of which being, the existence of a strong theoretical and empirical support for low and stable inflation as a necessary precondition for sustainable high growth.
5. Other anchors could be monetary aggregates (like in the past), national income, exchange rate, inflation, price level and just-do-it strategy [^2]
6. As food and fuel have majority share in our consumption basket, core inflation was not considered a good choice. *Core inflation is headline inflation minus food and fuel inflation.
7. One of the suggestions were also to conduct longer term repos to align the long term lending with the policy rate/repo rate.
2. [Feb 13, 2014](RBI_Notification_20140213_Term%20Repo%20under%20Liquidity%20Adjustment%20Facility-%20Operational%20Guidelines.pdf) - timings of the Term Repo auctions was revised from 2.30-3.00 PM to 11.00 - 11.30 AM.
3. [April 1, 2014](RBI_Notification_20140401_Liquidity%20Adjustment%20Facility.pdf)
1. The quantum of liquidity provided under overnight repos under the LAF was decreased **from 0.5% of bank-wise NDTL to 0.25% with immediate effect.**
2. The quantum of liquidity provided under 7-day and 14-day term repos was increased **from 0.5% of NDTL of the banking system to 0.75% with immediate effect.**
3. Aug 22, 2014 - Effective from September 5, 2014, RBI announced revised [Liquidity Management Framework (2014)](RBI_Press%20Release_20140822_RBI%20announces%20revised%20Liquidity%20Management%20Framework.pdf) to ==manage *day-to-day* liquidity== requirements arising out of frictional factors with the help of following LAF instruments, based on the recommendations of this committee. ^c5a53a
1. Lending:
1. Daily fixed rate 1-day repo (at the repo rate) repos equivalent to 0.25 per cent of bank-wise NDTL
2. Variable 14-day repos to be conducted 4 times in a fortnight, conducted 4 times during a reporting fortnight, i.e., on every Tuesday and Friday, between 11.00-11.30 AM for an amount equivalent to one-fourth of 0.75 per cent of NDTL in each auction
- ==Thus, it removed the unlimited accommodation on an overnight basis and started providing liquidity through term repos.==
- Since January 2014, variable rate term repo auctions of varied tenors (1-day, 3-day, 5-day, 7-day, 9-day, 21-day and 28-day) in addition to the regular 7-day and 14-day auctions, have been conducted from time to time, based on assessment of liquidity.
1. variable rate 1-day repo *(if required)*
2. Export credit refinance (at the repo rate) of 32 per cent of bank-wise outstanding eligible export credit bills (about 0.4 per cent of NDTL).
==Thus, even though the unlimited accommodation was removed, as the system continued to remain in deficit, the assured liquidity provision of one per cent NDTL (0.25 per cent of each banks’ NDTL available to it through overnight fixed rate repo and the rest through variable rate 14-day term repo auctions) was retained.
3. Later, in the monetary policy statement of April 2016, it was announced to progressively lower the average ex-ante liquidity deficit in the system to a position closer to neutrality.
2. Absorption:
1. Daily fixed rate reverse repo
2. (If required) variable rate 1-day/longer tenor reverse repos
3. Since June 2014, two 4-day term reverse repo auctions have been conducted.
3. By (fixed/variable rates)
1. Daily fixed rate 1-day repo and reverse repo
2. Variable rate 1-day/longer tenors reverse repos
3. Variable 14-day repos to be conducted 4 times in a fortnight ^9c0cd6
4. The durable liquidity was, managed through open market operations in government securities, viz. through auctions and those on the NDS-OM platform, [[Market Stabilisation Scheme (MSS), 2004|MSS]], forex operations.
5. Since 2013-14, further changes have been made in the operating procedures from time to time in conjunction with other measures, especially in the backdrop of:
1. exchange rate volatility following the Fed’s tapering indication on May 22, 2013 and #fed-taper #year-2013
2. the recommendations of the Expert Committee to Revise and Strengthen the Monetary Policy Framework in January 2014
6. [Oct 29, 2014](RBI_Notification_20141029_Fourth%20Bi-monthly%20Monetary%20Policy%20for%202014-15%20Introduction%20of%20Liquidity%20Adjustment%20Facility%20(LAF)%20for%20Scheduled%20Urban%20Cooperative%20Banks.pdf) - LAF and MSF was extended to Scheduled Primary (Urban) Co-operative Banks (UCBs)
## 2015
1. Feb 20, 2015 - Government of India and the RBI signed the [[Monetary Policy Decisions in the RBI - The Structure#^7b5d45|Monetary Policy Framework Agreement (MPFA)]].
2. Aug 3, 2015 - RBI introduced Straight Through Processing (STP) of fixed rate Liquidity Adjustment Facility (LAF) and [Marginal Standing Facility (MSF)](Marginal%20Standing%20Facility%20(MSF),%202011.md) Operations with effect from August 3, 2015.
3. [Nov 24, 2015](RBI_Press%20Release_20151124_RBI%20extends%20Window%20Timings%20of%20Fixed%20Rate%20LAF%20and%20MSF%20Operations.pdf) - RBI extended Window Timings of Fixed Rate LAF and MSF Operations. As the market participants had sufficiently long time window to place their bids/offers in repo and MSF/reverse repo, the option of physical bid submission by the market participants would be discontinued.
## 2016
**==This section is divided into 2 parts.==**
Part 1 - This [note](Monetary%20Policy%20Decisions%20in%20the%20RBI%20-%20The%20Structure.md#2016%20-%20FIT%20framework%20and%20formation%20of%20Monetary%20Policy%20Committee%20(MPC)) has details about formation of Monetary Policy Committee (MPC).
Part 2 - **Changes in Liquidity Management Framework** ^5bfc4e
1. [April 5, 2016](RBI_MPS_201604.pdf) - In the first Bi-monthly monetary policy statement for 2016-17), RBI [modified](https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=36654) the liquidity management framework.
2. It was decided to:
1. More focus on smooth supply of durable liquidity over the year using asset purchases and sales as needed;
2. ==progressively lower the average ex ante liquidity **deficit in the system to a position closer to neutrality** (as policy was accommodative) and that too without a significant fall in call rate;==
3. narrow the policy rate corridor from +/-100 bps to +/- 50 bps (*this was completed by April 2017 and it also helped helped in containing volatility in the overnight market, especially during demonetisation of Nov 2016*), ==the first change May 2011, by reducing the MSF rate by 75 basis points and increasing the reverse repo rate by 25 basis points, with a view to ensuring finer alignment of the weighted average call rate (WACR, the operating target of the monetary policy with the repo rate;
1. The RBI narrows the corridor to tightly lock the daily market rate (WACR) to the repo rate , which is only possible because active market operations, rather than passive standing facilities, do the actual heavy lifting of steering liquidity.
2. In other words, a narrow corridor helps to contain volatility in short-term interest rates and anchors the WACR to the repo rate.
3. If the liquidity situation is same with most of the participants, then WACR see big swings, and hence a narrow corridor is required.
4. ease liquidity management for banks without abandoning liquidity discipline by reducing the minimum daily maintenance of CRR from 95 per cent of the requirement to 90 per cent with effect from the fortnight beginning April 16, 2016;
5. allow substitution of securities in market repo transactions in order to facilitate development of the term money market; and
6. consult with the Government on how to moderate the build-up of cash balances with the Reserve Bank.
2. In other words, the liquidity management framework was fine-tuned since April 2016 with the objective of maintaining the operating target for its monetary policy, that is WACR, close to the policy rate (repo rate).
3. The durable liquidity requirements of the market were met while fine-tuning its LAF operations to make short-term liquidity conditions consistent with the stated policy stance.
4. To achieve this, a variety of instruments were used like:
1. fixed (discontinued later) and [variable rate repo/reverse repo of various maturities](Money%20Market%20Operations%20(MMO).md#RBI%20OPERATIONS),
2. the marginal standing facility [(MSF), since 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md),
3. [Standing Deposit Facility (SDF) since 2022 after amendments in 2018](Standing%20Deposit%20Facility%20(SDF),%202018.md),
4. [Open Market Operations (OMOs)](Open%20Market%20Operations%20(OMOs).md) in dated G-Secs,
5. [Market Stabilisation Scheme (MSS), 2004](Market%20Stabilisation%20Scheme%20(MSS),%202004.md) using T-Bills, CMBs and dated securities
6. *Not frequently:*
1. [Cash Management Bills](G-Secs-Primary%20Market.md#^f52884) *([[Measures to stabilise the exchange market#^2013|like August of 2013]])*
2. [forex swaps ](Forex%20Swaps.md)*(since March 2019)*
5. ==Variable rate reverse repo auctions(varying tenors) allowed the Reserve Bank to suck out excess short term liquidity from the system without the excess liquidity being deposited with the Reserve Bank through overnight fixed rate reverse repo, and it is thus possible for the Reserve Bank to keep the system closer to balance on average without the operational rate falling significantly.
6. ==Thus, the past rationale for keeping the system in significant average liquidity deficit no longer is as compelling, especially when the policy stance is intended to be accommodative. [^3] *But this won't hold in times of high and persistent surplus.*==
7. [May 2016](Act_The%20Finance%20Act-2016_28%20OF%202016_May%2014%202016_CHAPTER%20XII-PART%20I.pdf) - The RBI Act was amended by the Finance Act, 2016, and Flexible Inflation Targeting (FIT) was formally adopted as the approach or framework for making of monetary policy in 2016.
8. [Nov 25, 2016](RBI_Notification_20161125_Liquidity%20Adjustment%20Facility%20–%20Oil%20Marketing%20Companies%20Government%20of%20India%20Special%20Bonds%20(Oil%20Bonds)%20as%20eligible%20collateral%20under%20LAF%20MSF%20and%20Removal%20of%20Margin%20Requirement%20for%20Reverse%20Repos.pdf) - Oil Bonds issued by Government of India will qualify as eligible securities for Repos, Reverse Repos and Marginal Standing Facility (MSF).
9. [Nov 25, 2016](RBI_Notification_20161125_Liquidity%20Adjustment%20Facility%20–%20Oil%20Marketing%20Companies%20Government%20of%20India%20Special%20Bonds%20(Oil%20Bonds)%20as%20eligible%20collateral%20under%20LAF%20MSF%20and%20Removal%20of%20Margin%20Requirement%20for%20Reverse%20Repos.pdf) - It was decided **to do away with the margin requirement for the securities** provided by Reserve Bank of India as collateral to the successful participants in Reverse Repo operations (including Term Reverse Repos).
10. [October 4, 2016](RBI_MPS_R-MPC_201610.pdf) - The first meeting of MPC (which was also the 4th bi-monthly monetary policy announcement) took place.
## 2017
1. [April 6, 2017](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40071) - Narrowed from 100 bps to 50 bps
1. In the Statement on Developmental and Regulatory Policies accompanied with First Bi-monthly Monetary Policy Statement, 2017-18 (Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India), the width of the LAF corridor was reduced from 100 (+/- 50) bps (and 200 bps in April 2015) to 50 (+/-25) bps.
2. This was done in consonance with suggestions of the Expert [Committee](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30446) to revise and strengthen the [monetary policy framework](Monetary%20Policy%20Frameworks%20in%20India.md#2014) (chaired by Dr. Urjit Patel).
2. [April 12, 2017](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10919) - Substitution of Collateral under the LAF Term Repos (available since April 17, 2017)
1. It was decided, in the [First Bi-monthly Monetary Policy Statement for 2017-18](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=40069) announced on April 6, 2017, to allow substitution of collateral by market participants in the term repos under the LAF which will provide operational flexibility to them by enhancing liquidity of collaterals.
2. Before this, there was no provision for LAF participants to substitute the security offered as collateral to the Reserve Bank under term repos.
## 2018
1. [Oct 29, 2014](RBI_Notification_20141029_Fourth%20Bi-monthly%20Monetary%20Policy%20for%202014-15%20Introduction%20of%20Liquidity%20Adjustment%20Facility%20(LAF)%20for%20Scheduled%20Urban%20Cooperative%20Banks.pdf) - LAF and MSF was extended to Scheduled Primary (Urban) Co-operative Banks (UCBs).
2. [Aug 16, 2018](RBI_Notification_20180816_Introduction%20of%20Liquidity%20Adjustment%20Facility%20(LAF)%20and%20Marginal%20Standing%20Facility%20(MSF)%20for%20Scheduled%20Co-operative%20Banks.pdf) - LAF and MSF was extended to even Scheduled State Co-operative Banks (StCBs) which are CBS enabled and have CRAR of at least 9 percent.
3. With this, LAF and MSF were available to all Scheduled Co-operative Banks, which met the eligibility norms to participate in them.
## 2019
**Internal Working Group to Review the Liquidity Management Framework-2019**
1. Reserve Bank's liquidity management framework was last reviewed in 2014.
2. June 6, 2019 - ==RBI [constituted](RBI_MPS_SDRP_20190606.pdf) an Internal Working Group was set up to review the liquidity management framework== with a view to simplifying it and to suggest measures to clearly communicate the objectives and the toolkit for liquidity management.
3. [Sep 26, 2019](RBI_Press%20Release_20190926_RBI%20releases%20the%20Report%20of%20the%20Internal%20Working%20Group%20to%20Review%20the%20Liquidity%20Management%20Framework.pdf) - The [Report of the Internal Working Group to Review the Liquidity Management Framework-2019](RBI_Group-Committee_20190926_Report%20of%20the%20Internal%20Working%20Group%20to%20Review%20the%20Liquidity%20Management%20Framework.pdf) was published, and was one of detailed analysis of the liquidity management framework.
4. In 2019, the current liquidity management framework of the Reserve Bank was driven by **two objectives:**
1. to supply or withdraw short term liquidity from the market so as to offset frictional changes in reserves;
1. The is met by smoothing short-term seasonal or frictional fluctuations/mismatches through LAF (i.e Main + fine-tuning (varying tenors) repo/reverse-repo auctions) to keep the system liquidity conditions closer to neutrality.
2. and to supply durable reserves in line with the growing economy.
1. This is met by modulating
1. Net Foreign Assets (NFA) (i.e., accretion or depletion of FX reserves) and/or
2. Net Domestic Assets (NDA) (i.e., purchase or sale of domestic securities through OMOs) in the Reserve Bank’s balance sheet in sync with the growth of the economy.
3. **Why and/or?**
1. When the Reserve Bank purchases significant foreign assets (foreign exchange like US$) through forex interventions, the size of domestic assets ==may have to reduce== (that is lesser holdings with RBI of govt. debt) through open market sale of domestic bonds for [[Forex Market Interventions and Sterilisation|sterilization]] (for instance, 2017-18) and
2. When there is a sale of foreign assets, the size of domestic assets may have to rise through [[Open Market Operations (OMOs)|OMO]] purchase operations/[[Market Stabilisation Scheme (MSS), 2004|MSS]] (for instance, 2018-19).
3. *Thus, depending on cash needs of the economy and price levels, RBI may modulate (increase or keep unchanged) the supply of reserve money.*
4. We can recall the sources of [[Reserve Money|Reserve Money]] here = Net RBI's credit to banks/RBI's Net Claims on Banks $+$ RBI's Credit to the Commercial Sector ([Central Bank Liquidity for Standalone Primary Dealers](Primary%20Dealers%20(PDs).md#Central%20Bank%20Liquidity%20for%20Standalone%20Primary%20Dealers)) $+$ **NFA $+$ NDA** $+$ Purchase of Coins from Govt. $-$ Net Non-Monetary Liabilities (NNML)
## 2020
^04e5b5
1. ==In Feb-2020, effective from 14 February, after period of 6 years, RBI made significant [revisions](RBI_MPS_SDRP_20200206.pdf) to the liquidity management framework and thereby the [liquidity facilities](RBI_Press%20Release_20200206_Liquidity%20facilities%20under%20revised%20Liquidity%20Management%20Framework.pdf) based on the suggestions of the above [Internal Working Group to Review the Liquidity Management Framework-2019](RBI_Group-Committee_20190926_Report%20of%20the%20Internal%20Working%20Group%20to%20Review%20the%20Liquidity%20Management%20Framework.pdf)
1. ==With the WACR being the single operating target, the need for specifying a one-sided target for liquidity provision of 1% of net demand and time liabilities (NDTL) was removed.==
2. The assured daily overnight fixed rate reverse repos were withdrawn, and replace by variable rate reverse repo (VRRR) fine-tuning operations.
3. In other words, instead of guaranteeing absorption at fixed reverse repo every day, RBI decided to manage liquidity more flexibly so WACR stays aligned with repo rate rather than getting pulled down close to the reverse repo floor in times of abundant liquidity with banks.
4. Along with overnight/daily fixed rate repo, the four 14-day variable repos in a fortnight–were withdrawn too.
1. With system in surplus, daily repo was discontinued. RBI also wanted banks to manage their daily needs from the inter-bank market.
2. However from [Jan 2025](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59531) - RBI has been [conducting](https://rbi.org.in/scripts/SearchResults.aspx?search=RBI+to+conduct+day+Variable+Rate+Repo+VRR+auction+under+LAF) overnight variable rate repo auction daily, between 10:00 AM and 10:30 AM, from Monday to Friday, because of the increased liquidity deficit . 24\*7 banking has also played a crucial role for banks to seek daily overnight borrowing window as the main cash management tool.
5. LAF was now unrestricted by quantitative ceilings.
6. Liquidity management (implemented by LAF and other instruments) remained the operating procedure of monetary policy
7. Marginal standing facility (MSF) rate continued to be the upper bound (ceiling) and the fixed reverse repo rate as the lower bound (floor), with the policy repo rate in the middle of the corridor.
8. Fixed rate reverse repo was retained but discontinued by April 08, 2022.
9. The width of the corridor remained unchanged at 50 basis points, but were changed on March 27, 2020 and April 17, 2020.
1. March 27, 2020 - Reverse Repo rate was set at 4%, that is 40 bps below the policy rate of 4.4%, and MSF was unchanged at 4.65%. Thus the corridor was widened to 65 bps.
2. April 17, 2020 - Only reverse repo rate was changed and was reduced to 3.75%. With this the corridor was widened to 90 bps.
3. It was done to discourage banks to park their surplus liquidity with the RBI, and thus use those funds for lending, like in corporate bonds. It was one of the measures for the exceptional times during Covid-19.
4. The width of the corridor is 50 bps since April 08, 2022.
10. The number of operations were minimized to improve the efficiency goal of the liquidity framework, and one single overnight variable rate operation in a day, supported by fine-tuning operations, if required, was introduced.
1. **Main:** The variable rate 14-day term repo/reverse repo operation became the 'Main' operation (conducted to coincide with the cash reserve ratio (CRR) maintenance cycle). Here "Main" refers to main liquidity management tool for managing frictional liquidity requirements.
2. **Fine-tuning:** The above was supported with short tenor operations, viz. other than 14 days, as 'fine tuning operations'.
3. ==The LAF data in the section 'RBI Operations' in the daily Money Market operations press release was now divided by Fixed and Variable Rate.==
2. Here is the summary of the key elements [^4] of the [revised framework of 2020.](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49352).
3. [Mar 13, 2020](RBI_Press%20Release_20200313_Liquidity%20Operations%20under%20the%20Liquidity%20Adjustment%20Facility.pdf) - Forex Swaps and LAF
1. To counterbalance the domestic liquidity effects that the sell-buy swap may entail, RBI announced 7-day variable rate term repo auctions.
4. [April 17, 2020](https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3853) - Width of the corridor increased from 65 bps to 90 bps
1. In an unscheduled address, the RBI Governor cut the reverse repo rate by 25 basis points, from 4% to 3.75%. The objective was to make it less attractive for banks to park surplus funds with the RBI and encourage them to increase lending. This move widened the LAF corridor from 65 basis points to 90 basis points.
5. Jul 13, 2020 - An article titled [Liquidity Management in the Time of Covid-19: An Outcomes Report](RBI_Monthly_Bulletin_Article_20200713_Liquidity%20Management%20in%20the%20Time%20of%20Covid-19-An%20Outcomes%20Report.pdf) was published in the monthly RBI Bulletin
6. [December 4, 2020](RBI_Notification_20201204_Introduction%20of%20Liquidity%20Adjustment%20Facility%20(LAF)%20and%20Marginal%20Standing%20Facility%20(MSF)%20for%20Regional%20Rural%20Banks%20(RRBs).pdf) - Liquidity Adjustment Facility (LAF) and Marginal Standing Facility (MSF) will be extended to Scheduled RRBs which met certain conditions.
## 2022
1. [April 8, 2022](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=53536) - Width of the LAF corridor restored to 50 bps.
1. In Statement on Developmental and Regulatory Policies accompanied with Monetary Policy Statement, 2022-23, Resolution of the Monetary Policy Committee (MPC), April 6-8, 2022, the total width of the LAF corridor was restored to its pre-pandemic configuration of 50 bps.
2. [April 08, 2022](RBI_MPS_SDRP_20220408.pdf) - The [Standing Deposit Facility (SDF), 2018](Standing%20Deposit%20Facility%20(SDF),%202018.md) facility became [effective](RBI_Press%20Release_20220408_RBI%20to%20operationalise%20Standing%20Deposit%20facility%20(SDF).pdf) and it emerged as financial stability tool in the event of _excess liquidity_ with banks.
3. The SDF replaced the fixed rate reverse repo (FRRR) as the floor of the LAF corridor
## LAF Corridor
Here is a short note on duration/period of width of the LAF Corridor In India
1. [Between Apr 27, 2001 and May 3, 2011](RBI_Group-Committee_20110315_Report%20of%20the%20Working%20Group%20on%20Operating%20Procedure%20of%20Monetary%20Policy_Chairman-Deepak%20Mohanty.pdf#page=15&selection=2,13,2,21), the interest rate corridor was not symmetrical, viz. the difference between repo rate (the ceiling) and reverse-repo rate (the floor) varied between 100 bps and 300 bps*. [^1]
1. [July 27, 2010](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=22884) - Narrowed from 150 bps to 125 bps
1. The repo rate was raised from 5.5 per cent to 5.75 per cent and the reverse repo rate from 4 per cent to 4.50 per cent.
2. This asymmetric raise in rates narrows the total width of the AF corridor from 150 bps to 125 bps.
2. The operation of the LAF during April 2001 to February 2011 indicates that the repo and reverse repo rates were changed either separately or together 39 times, leading to changes in the corridor width 26 times.
1. [May 3, 2011](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24335) - Widened from 125 bps to 200 (+/- 100) bps, making it symmetric around the repo rate.
1. The corridor was made symmetric in May 2011, with a fixed width of 200 bps between the ceiling of the corridor, i.e., MSF rate and the floor of the corridor, i.e., reverse-repo rate. Both were placed 100 bps above and below the repo rate, respectively.
2. But higher width also leads to more volatility in rates, and hence the width was reduced in later years.
3. ==Since May 2011, thus only repo rate has been changed, along with occasional changes in the width of the corridor.==
4. [April 5, 2016](https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=36654) - Narrowed from 200 bps to 100 bps
1. In the first Bi-monthly monetary policy statement for 2016-17, RBI narrowed the policy rate corridor from 200 (+/-100) bps to 100 (+/- 50) bps.
2. Narrower LAF corridor tightly anchors the call money rate around the policy repo rate.
3. When overnight rates don’t spike or crash, the policy rate transmits more cleanly to market rates and then to borrower rates. In other words, there is better (improved) monetary policy transmission.
5. [April 6, 2017](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=40071) - Narrowed from 100 bps to 50 bps
1. In the Statement on Developmental and Regulatory Policies accompanied with First Bi-monthly Monetary Policy Statement, 2017-18 (Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India), the width of the LAF corridor was reduced from 100 (+/- 50) bps. bps (since April 5, 2016) to 50 (+/-25) bps
2. The width of the policy rate corridor was reduced from 200 bps in April 2015 to 50 bps in April 2017 in consonance with suggestions of the expert [committee](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30446) to revise and strengthen the [[Monetary Policy Frameworks in India|monetary policy framework]] (chaired by Dr. Urjit Patel).
6. [March 27, 2020](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=49582) - Widened from 50 bps to 65 bps, making it asymmetric.
1. In Statement on Developmental and Regulatory Policies accompanied with Seventh Bi-monthly Monetary Policy Statement, 2019-20 (Resolution of the Monetary Policy Committee (MPC) Reserve Bank of India), the total width of existing policy rate corridor was widened from 50 bps to 65 bps.
2. Under the new corridor, the reverse repo rate under the liquidity adjustment facility (LAF) was 40 bps lower than the policy repo rate. The marginal standing facility (MSF) rate would continue to be 25 bps above the policy repo rate.
7. [April 17, 2020](https://www.rbi.org.in/Scripts/bs_viewcontent.aspx?Id=3853) - Widened from 65 bps to 90 bps, keeping it asymmetric.
1. In an unscheduled address, the RBI Governor cut the reverse repo rate by 25 basis points, from 4% to 3.75%. The objective was to make it less attractive for banks to park surplus funds with the RBI and encourage them to increase lending. The policy repo rate remains unchanged at 4.40 per cent, and the marginal standing facility rate and the Bank Rate remain unchanged at 4.65 per cent.
2. This move widened the LAF corridor from 65 basis points to 90 basis points.
8. [April 8, 2022](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=53536) - Narrowed to restore it to 50 bps.
1. In Statement on Developmental and Regulatory Policies accompanied with Monetary Policy Statement, 2022-23, Resolution of the Monetary Policy Committee (MPC), April 6-8, 2022, the total width of the LAF corridor was restored to its pre-pandemic configuration of 50 bps.
## 2025
1. April 2025 - [Report](RBI_Report_20250502_Working%20Group%20on%20Comprehensive%20Review%20of%20Trading%20and%20Settlement%20Timings%20of%20Markets%20Regulated%20by%20the%20Reserve%20Bank.pdf) of the Working Group on Comprehensive Review of Trading and Settlement Timings of Markets Regulated by the Reserve Bank of India
2. [Aug 6, 2025](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=60963) - [Report](https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1305) of the Internal Working Group to Review the Liquidity Management Framework, chaired by Dr. Poonam Gupta
## Current
The section 'RBI operations' in the daily money market operations press release has following groups:
**LAF Operations**
1. LAF-Repos (Repo & Reverse Repo Operations)
2. [Marginal Standing Facility (MSF), 2011](Marginal%20Standing%20Facility%20(MSF),%202011.md)
3. [Standing Deposit Facility (SDF), 2018](Standing%20Deposit%20Facility%20(SDF),%202018.md)
### Fixed Rate
#### Overnight
1. The fixed rate daiIy/overnight repo was discontinued after feb-2020.
2. The fixed rate daily/overnight reverse repo was discontinued after April 8, 2022 with the introduction of [[Standing Deposit Facility (SDF), 2018|Standing Deposit Facility (SDF)]], to allow RBI to absorb surplus cash without any collateral, and fixed rate reverse repo rate was replaced by SDF as the floor of the corridor.
3. The daily MMO report was ==modified to show the daily operations and the outstanding operations since feb-2020.==
### Variable Rate
The variable rate LAF operations are conducted for different tenors.
#### Main Operation
1. The main operation of LAF is the ==variable-rate 14-day term repo/reverse repo==. These are for tenor of 14 days. They are conducted at not a fixed rate but at a variable rate, which is decided during the auction. The aim is to align the lending by the RBI with the CRR maintenance cycle for managing frictional liquidity requirements.
2. It is the main liquidity management operation.
3. They are also referred as 14-day VRR (variable rate)/VRRR (variable rate reverse repo) auctions.
4. ==So it is done on every reporting Friday to help banks with any liquidity mismatch, between 10:30 AM to 11:00 AM==
5. Note the variable reverse repo rate auctions offer a higher remuneration to the banks than the fixed rate reverse repo in view of the longer tenor (14-days).
6. Here 14 day is called 'term' repo, which is a different usage as term money, as any repo for more than a day is a term repo.
7. Bids at or below the repo rate get rejected.
#### Fine Tuning Operations
1. The fine tuning operations are the variable rate repo/reverse repo auctions of varying tenors, ranging from overnight to less than 28 days, but other than 14 days. It is not pre-scheduled like the main operation but conducted at discretion (ad-hoc basis) of the RBI. If there are any unanticipated liquidity changes during the reserve maintenance period, RBI could conduct fine tuning operations.
2. If required, RBI could also conduct longer tenor variable rate repo/reverse repo auctions
3. Daily Variable Rate Repo (VRR) Auction - [From January 16, 2025](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=59531), RBI [conducted](https://rbi.org.in/scripts/SearchResults.aspx?search=RBI+to+conduct+day+Variable+Rate+Repo+VRR+auction+under+LAF) overnight variable rate repo auction daily, between 10:00 AM and 10:30 AM, from Monday to Friday till [June 11, 2025](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=60629).
#### Long Term Operations
1. These are repos with tenor greater than 14 days.
2. As on April 2025, RBI has also been conducting (not frequently) long term variable rate repos and reverse repos.
3. It is shown under the head - 2.Variable Rate/III. Long Term Repo on money market operations [press release](https://rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=599180).
4. [[Long-Term Repo Operations (LTROs)|Long-term repo operations (LTROs)]] at the policy repo rate, with tenors such as 1 year and 3 years, have proven effective monetary instruments in transmitting monetary policy signals through the interest rate channel, helping to reduce short-term and, eventually, long-term government securities (G-sec) yields.
5. The Urjit Patel Committee Report sought to conduct longer term repos to allow banks to align long term lending with policy rate(repo rate)
6. As on April 2025, RBI has also been conducting (not frequently) long term variable rate repos and reverse repos.
### Process
1. The auction is conducted on CBS (e-Kuber) platform.
2. **Participants:** ^d27841
1. Only scheduled commercial banks (including Regional Rural Banks) and Primary Dealers (PDs) are allowed. They have to maintain current account and SGL account with RBI for the for settlement securities and funds.
2. On [December 4, 2020](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=12004), it was announced that even Regional Rural Banks (RRBs) will be allowed to avail LAF and MSF facility.
3. Standalone Primary Dealers:
1. SPDs were permitted to participate in all *overnight* liquidity management operations until March, 2025
2. March 2025 - They are allowed in all repos, irrespective of tenor, but are not allowed to participate in MSF
3. Minimum bid amount for the auction is 1 crore and multiples thereof.
4. **SLR:**
1. The securities held by RBI under repo is not considered as SLR as it is an encumbered investment.
2. Only the borrowed/received securities from RBI under reverse repo, from October 3, 2016) are considered [eligible](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=10640#NT14) for SLR.
5. Along with above decision, from [Nov 2016](https://rbidocs.rbi.org.in/rdocs/content/pdfs/RRRT101116_AN.pdf), the market value of collateral securities is taken for the purpose of RBI Repo (including MSF) and Reverse Repo operations and re-repoing of securities received under RBI Reverse Repo operations is allowed.
6. Announcement of the results of the repo/reverse auctions and the settlement takes place on the same day.
7. ==There is no provision of an upper limit to the assured liquidity, that is the previous provision of up to 1% of NDTL, has been removed since the the current liquidity framework would entirely meet the system’s liquidity needs.==
8. Bids at or below the repo rate in variable auction are not accepted, as all may bid at the same repo rate and there will be no price discovery and it will just be a fixed rate auction.
9. Allotment is based on multiple price method using rates.
10. Coupon, if any, will be transferred to the RBI in the case of reverse repos and RBI will collect the coupon if any on the due dates and credit the same to the party’s Current Account in the case of repos.
11. **Margin & Collateral (LAF/MSF)**
1. Collateral: At present, the Reserve Bank accepts T-bills, central government dated securities, including oil bonds and state development loans (SDLs) as collateral for availing liquidity assistance through repo which are over and above the [[SLR - Statutory Liquidity Ratio|SLR]] requirement. For [[Marginal Standing Facility (MSF)|MSF]], banks can dip into the required SLR.
2. Margin for LAF/[MSF](Marginal%20Standing%20Facility%20(MSF),%202011.md#^c81403) are same
12. The LAF operations are conduced on RBI's CBS software called e-Kuber. In 2011, RBI chose Polaris Software Lab limited to implement this core banking system.
1. Funds settlement shifted to CBS from June 2012 and
2. Securities settlement shifted to CBS from October 2012 onwards.
13. **[[Trading & Settlement Timings of Market regulated by RBI|Timings:]]**
1. [[RBI_Press Release_20110809_Reverse Repo Window under Liquidity Adjustment Facility and Marginal Standing Facility – Change of Timing.pdf|August 9, 2011]]
1. LAF Repo between 9.30 am and 10.30 am (unchanged)
2. LAF Reverse Repo between 4.30 pm to 5.00 pm
3. Before this change, LAF timings were 9:30 AM to 10:30 AM
2. [[RBI_Press Release_20120711_Reverse Repo Window under Liquidity Adjustment Facility and Marginal Standing Facility – Change of Timing.pdf|July 11, 2012]]
1. LAF Repo - 9.30 AM and 10.30 AM all working days in Mumbai (excluding Saturdays).
2. LAF Reverse repo - 4.45 PM and 5.15 PM on all working days in Mumbai (excluding Saturdays)
3. [Nov 24, 2015](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=35547)
1. LAF Repo - 9.00 AM to 3.00 PM
2. LAF Reverse Repo - 5.30 PM to 7.30 PM
4. [Oct 29, 2018](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=45351)
1. LAF (Fixed Rate Repo) - 9.00 am and 4.00 pm on all working days in Mumbai. Earlier it was 9.00 am and 3.00 pm.
5. <span style="background-color:#F0FFFF;">As of now, LAF Auction (Main/1-day) take place between 10:00 AM to 10:30 AM and 14-day LAF Auction is conducted between 11:00 AM to 11:30 AM.</span>
<br>
![[RBI_Image_20251201_LAF Timings.png|550]]
Source - *[Report](RBI_Group-Committee_20250502_Working%20Group%20on%20Comprehensive%20Review%20of%20Trading%20and%20Settlement%20Timings%20of%20Markets%20Regulated%20by%20the%20Reserve%20Bank.pdf) of the Working Group on Comprehensive Review of Trading and Settlement Timings of Markets Regulated by the Reserve Bank of India (April 2025)*
14. *LAF fine-tuning auctions (varying tenors but between 2 to 14 days) can be announced and conducted any time during the day.
15. The results of the LAF auction are announced by noon.
16. The settlement of the first leg of all repos/ reverse repos happens on the same day within an hour of the announcement of auction result.
## Timeline - LAF Instruments
> [!normalg]
> <div style="height:375px"><iframe src="https://docs.google.com/spreadsheets/d/e/2PACX-1vTkk7vY9D78DcMMiDYJUne5q-yYR3bmt4fcLykQgvPnCwuBhZxRXxitMLdHX4ZQY6dzAk1LI6snA5l1/pubhtml?gid=969284778&single=true&widget=true&headers=false" width="100%" height="200%" frameborder="0"></iframe>></div>
## Instruments of Liquidity Management
^fb61a9
>[!info]+ These instruments to manage liquidity are subset of instruments of monetary policy:
>1. Liquidity are of two nature- Short-term/temporary and Durable
>2. Here the word "durable" has not been defined by the RBI in quantitative terms.
>3. **Transient/Frictional/Temporary liquidity** - Temporary liquidity surplus/deficit arises when there is a mismatch between assets and liabilities for a short-period of time.
> 1. LAF
> 1. Repos- (Main (1-day) and Fine Tuning (varying tenors but up to 14 days) operations through Variable Rate Repos-VRR/Variable Rate Reverse Repos-VRRR),
> 2. Standing Facilities like [[Marginal Standing Facility (MSF), 2011|Marginal standing facility (MSF)]], [[Standing Deposit Facility (SDF), 2018|Standing Deposit Facility (SDF)]],
> 2. ~~[SLF](Money%20Market%20Operations%20(MMO).md#D.%20Standing%20Liquidity%20Facility%20(SLF)) for Standalone Primary Dealers~~ - SLF is a sector-specific support tool, not used to directly target banking system liquidity.
> 1. SLF by SPDs increases [reserve money](Reserve%20Money.md) as "RBI credit to the Commercial Sector" increases along with "Other Deposits with RBI". It then moves to the banks, and "Other Deposits with RBI" falls and "Excess Reserve of Banks/Bankers' Deposits with RBI" increases, and thus it adds liquidity to the banking system, and becomes a "liquidity management" driver of system liquidity
> 2. ~~ECR (Export Credit Refinance)~~ - has been discontinued since [February 6, 2015](https://rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=9539).
>
> <!-- Blank line between lists -->
>4. **Durable/Persistent/Structural** Liquidity: Large liquidity deficit or surplus, if expected to persist, is offset or neutralised through appropriate durable liquidity operations respectively.
> <!-- Blank line between lists -->
> 1. Long term repos (LTR) like [(On-Tap LTRO or T-LTRO)](Long-Term%20Repo%20Operations%20(LTROs).md) or long-term reverse repos (LTRR)
> 2. RBI's operations in government securities:
> 1. [[Open Market Operations (OMOs)|OMOs]] in [[G-Secs-Primary Market|dated central and state government securities]], in the form of outright purchases/sales, buybacks and redemptions.
> 2. [[Market Stabilisation Scheme (MSS), 2004|MSS]] in dated G-Secs, T-Bills, CMBs (after a period of capital inflows) *(not often)*
> 3. ~~[Cash Management Bills (CMBs)](G-Secs-Primary%20Market.md#^f52884)~~ - when issued for liquidity absorption, for example in [[Measures to stabilise the exchange market#^2013|August of 2013]] *(not often)*
> 3. [Forex Swaps](Forex%20Swaps.md).
> 1. Long-term forex swap auctions (like the first Buy/Sell auction was conducted for USD 5 billion for a tenor of 3 years on March 26, 2019)
> 2. Forex Interventions (purchase/sale of FCA) are primarily exchange-rate management operations that create liquidity effects, while forex swaps are explicitly used as liquidity management instruments.
> 4. ~~Direct instruments like directed (sectoral) credit, refinancing like (export credit refinance) are not used now~~ whereas [Cash Reserve Ratio (CRR)](Cash%20Reserve%20Ratio%20(CRR).md) is rarely used. Rather, the above listed indirect instruments (OMOs, LAF, FX Swaps) are used to effect monetary policy.
> 1. Directed credit, like priority-sector lending (PSL), Standing Liquidity Facility (SLF) to standalone primary dealers (SPDs), etc. exists but they are developmental policy tools and not used as liquidity management tool.
> 5. ~~Policy Rate (which is Repo Rate in India)~~ is a key monetary policy instrument, and NOT a liquidity management tool. A change in policy rate can indirectly influence durable liquidity by changing the interest liabilities on transactions with RBI. It does not itself inject or absorb liquidity. Repo rates are short-term rates for borrowed reserves (liquidity from RBI for the banks), and long-term rates move when there is a direct injection/absorption of "long-term/durable" liquidity.
> 6. ~~Use of administered interest rates on deposits and lending~~ has been discontinued as a monetary policy tool.
> 7. Related Note - [Drivers/Sources of durable liquidity with the banking system](Money%20Market%20Operations%20(MMO).md#Drivers/Sources%20of%20durable%20liquidity%20with%20the%20banking%20system)
>
>**Summary:** reserve requirements, long-term lending/borrowing with banks, OMOs and MSS, forex operations
><!-- Blank line between lists -->
>**RBI Monetary Policy Statement of April 2016:** Experience suggests that the provision of short term/frictional liquidity does not substitute fully for durable liquidity, though durable liquidity can substitute for short term/frictional liquidity needs.
><!-- Blank line between lists -->
>*Internal Working [Group](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=944) to Review the Liquidity Management Framework-2019 had suggested that large deficit or surplus, which is greater than about 0.25 per cent to 0.5 per cent of NDTL, be managed by durable liquidity operations.*
><!-- Blank line between lists -->
>*Working [Group]([Report](https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=24063) on Operating Procedure of Monetary Policy-2011 suggested that persistent liquidity in excess of (+) / (-) one per cent of the NDTL should be managed through other/durable instruments.*
![[Reserve Money#^1cef6c]]
>==Table 3: Variation in Reserve Money and Main Durable Liquidity Drivers - RBI Bulletin August 2018==
>Box III.1 - [Liquidity Management Challenges from Forex Market Operations](RBI_Annual%20Report_2025.pdf) in RBI's Annual Report-2025
## Short Commentary on LAF
1. LAF is tool for both liquidity management and also a signalling device for interest rates in the overnight money market
2. Several reform measures since the early 1990s helped in introduction of LAF
3. They were focussed on: [^11]
1. dismantling various price and non-price controls in the financial system to facilitate integration of financial markets, removing structural bottlenecks,
2. introducing new players/instruments, ensuring free pricing of financial assets, relaxing quantitative restrictions, strengthening institutions,
3. improving trading, clearing and settlement practices,
4. encouraging good market practices and promoting greater transparency
4. LAF has helped banks to manage their daily mismatches in liquidity, generally which is also called the short-term/frictional liquidity.
5. Both bank rate and repo rate have guided money interest rates. [[Bank Rate|Bank Rate]] represented medium-term policy outlook and LAF rates helped to manage short-term liquidity on a day-to-day basis. multiplicity of rates did not help in proper signaling of stance of policy rates. By 2003, this multIplicity of rates was ended. Bank Rate remain unchanged from 2003 to 2011, when it was set as the upper corridor of LAF. This rate was given a new name [[Marginal Standing Facility (MSF), 2011|MSF]]
6. The liquidity management is premised on the [principle](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=944#CP37:~:text=Liquidity%20management%20is,the%20policy%20rate.) that banks are *required to hold*, at the end of the day, a certain level of cash in their accounts with the central bank, called required reserves. As a bank’s cash balances change throughout the day consequent to customer transactions, each bank’s surplus/shortage of reserves at the end of the day is also uncertain. If the banks try to meet cover their shortage of reserves through the overnight/call money market, then call money/overnight inter-bank rate will become volatile.
7. Thus ==central banks conduct LAF operations, primarily, to manage the supply of shortage/excess reserves, by lending and borrowing through their liquidity facilities, and help the central banks, formally and informally, keep the overnight market rates close to the policy rate (repo rate in India) within a corridor.
8. In the coming years after LAF's introduction in June 2000, as overnight/call money rate became the focus/operating target of the monetary policy, and the containing this rate around the policy repo rate within a corridor became the operating objective, LAF was also supported by other tools, viz. standing facilities, to manage conditions like extreme excess and shortage of cash with banks.
5. If banks require funds, they could borrow through repos, that is against any SLR assets over and above [[SLR - Statutory Liquidity Ratio|SLR+LCR]] requirement, from the RBI. Here banks would provide these **eligible securities** as collateral and repurchase them with the payment of the interest rate, called repo rate, and the principal. Thus essentially, through repos in the LAF operation, banks convert any SLR assets (over and above SLR+LCR) to CRR. *LCR was introduced only after 2015*.
6. If the banks had surplus cash, then in absence of demand for reserves from other banks in the inter-bank market, they could lend it to the RBI and receive securities as collateral. RBI would pay interest rate at the reverse repo rate, which is variable these days. Thus reverse repos helped RBI to absorb liquidity or excess reserves from the system. Also these securities are [eligible](https://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=2283#:~:text=Provided%20that%20the%20instruments%20that,up%20to%20October%202%2C%202016) for SLR from October 3, 2016.
7. *Here, the aim is not replace inter-bank market with LAF, but to avoid volatile movements in call money market.
8. For LAF, the banks can borrow only against eligible securities held in excess of the securities held as SLR requirement. If banks had shortage of the eligible securities, they could borrow under [[Marginal Standing Facility (MSF), 2011|MSF]] (introduced in May-2011), which allows banks to borrow against certain portion of the SLR.
9. Thus LAF was aimed to manage **short-term liquidity** of the system. With occasional [[Long-Term Repo Operations (LTROs)|long-term repos]], RBI also provides long-term liquidity. The role of the LAF window was to deal with frictional liquidity deficit/surplus. Liquidity of a more durable nature was to be managed with other instruments.
10. Since the initial introduction of ILAF in 1999, the liquidity facilities provided by the RBI have seen changes.
11. ==To recall, repo rate is just a short-term rate. The borrowings from call money market is not expected by RBI to be >a basis for long-term investments. Hence, for short-term rates to affect the long-term rates which is relevant for investments) there has to be sufficient supply of durable liquidity. The supply of short-term liquidity by RBI does not fully substitute the need for durable liquidity. [^9]
## Groups & Committees
1. These are the [committees/working groups/discussion papers](Monetary%20Policy%20Frameworks%20in%20India.md#Groups%20and%20Committees) constituted on issues of monetary policy (including liquidity management).
## Related Notes
1. [Monetary Policy Frameworks in India](Monetary%20Policy%20Frameworks%20in%20India.md)
2. [[Reserve Money]]
3. [[Open Market Operations (OMOs)]]
4. [[Market Stabilisation Scheme (MSS), 2004]]
5. [[Bank Rate]]
## References
1. [Link](Monetary%20Policy%20Frameworks%20in%20India.md#References)
[^1]: [Duration of Width of Corridor in India](https://rbi.org.in/scripts/PublicationReportDetails.aspx?UrlPage=&ID=631)
[^2]: RBI. (2003, December). *[Report](https://rbi.org.in/scripts/BS_ViewBulletin.aspx?Id=4960#:~:text=The%20LAF%20operations,term%20interest%20rates.)of the Internal Group on Liquidity Adjustment Facility-2003*.
[^3]: First Bi-monthly [Monetary Policy Statement](https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=36654#:~:text=Finally%2C%20given%20that,to%20be%20accommodative), 2016-17, by Dr. Raghuram G. Rajan, Governor
[^4]: [Revised](https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=49343) liquidity management framework announced in Feb 2020 in the Statement on Developmental and Regulatory Policies-2020
[^5]: [Appendix Table AT-2: Chronology of Liquidity Adjustment Facility, Report of the Working Group on Operating Procedure of Monetary Policy-March 2011](https://rbi.org.in/scripts/PublicationReportDetails.aspx?ID=631#:~:text=Appendix%20Table%20AT%2D2%3A%20Chronology%20of%20Liquidity%20Adjustment%20Facility)
[^7]: [Economic Survey - 1997](https://www.indiabudget.gov.in/budget_archive/es96-97/CHAP4.HTM)
[^8]: [Monetary and Credit Policy for the year 2000-2001](https://rbi.org.in/Upload/Notification/Pdfs/13026.pdf)
[^9]: [RBI and the Liquidity Question](https://www.mse.ac.in/wp-content/uploads/2019/05/business-line-june-2-2016.pdf), The Hindu Business Line, 1 June, 2026
[^10]: A [study](https://www.niti.gov.in/sites/default/files/2023-03/A%20Project%20Draft%20On%20%E2%80%9CPolicy%20Interest%20Rates%2C%20Market%20Rates%2C%20Inflation%20and%20Economic%20Growth%E2%80%9D.pdf) titled 'Policy Interest Rates, Market Rates, Inflation and Economic Growth' by EGROW foundation.
[^11]: Shaktikanta Das. (Jan 24, 2020). ==Seven Ages of India’s Monetary Policy==. (Shri Shaktikanta Das, Governor, Reserve Bank of India - January 24, 2020 - at the St. Stephen's College, University of Delhi). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1092)