Analyze the operational mechanics of the Liquidity Adjustment Facility administered by the Reserve Bank of India. Which instruments are utilized under this framework?

💡 Solution & Explanation

The Liquidity Adjustment Facility is the primary operational framework used by the Reserve Bank of India to inject or absorb liquidity on a daily basis through repo and reverse repo operations. Under repo, banks borrow short-term funds from the central bank by pledging eligible government securities, whereas under reverse repo, banks park excess liquidity with the central bank against collateral. This mechanism aids in steering the call money market rate towards the policy repo rate. The introduction of the standing deposit facility further expanded liquidity management tools without requiring collateral securities.