All About REPO RATE and REVERSE REPO RATE {LAF-Liquidity Adjusted Facility} Monetary Policy Of RBI

Lesson 3 of 6 • 25 upvotes • 9:38mins

Vikas Kumar Singh Tomar

Liquidity Adjustment Facility (LAF): LAF is a monetary policy tool which allows banks to borrow money through repurchase agreements. LAF is used to aid banks in adjusting the day to day mismatches in liquidity. LAF has two components -- repo and reverse repo. Repo or repurchase option is a collaterised lending i.e. banks borrow money from RBI to meet short term needs by selling securities to RBI with an agreement to repurchase the same at predetermined rate and date. The rate charged by RBI for this transaction is called the repo rate. Repo operations therefore inject liquidity into the system. Reverse repo operation is when RBI borrows money from banks by lending securities. The interest rate paid by RBI is in this case is called the reverse repo rate. Reverse repo operation therefore absorbs the liquidity in the system.