Liquidity adjustment facility (LAF), also known as the liquidity corridor, essentially indicates the difference between the repo rate and the reverse repo rate. It was introduced in year 2000 following recommendation of Narasimham Committee Report on Banking Reforms. Before that in April 1999, an Interim LAF was introduced to provide a ceiling. Under the scheme, RBI conducts auctions to absorb (through reverse repo auctions) and inject (through repo auctions) liquidity into the financial system. The funds from the Facility are expected to be used by the banks for their day-to-day mismatches in liquidity. Presently the repo and reverse repo at 4% and 3.35% respectively.
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