Economics • Banking & FinanceMedium
What does the term 'Liquidity Adjustment Facility (LAF)' encompass in monetary policy operations?
A. The regulation of capital adequacy norms under Basel accords.
B. The primary tool of the central bank to manage day-to-day liquidity through repo and reverse repo operations.✓ Correct Answer
C. The mandatory gold reserve held by commercial banks against public deposits.
D. The statutory transfer of surplus funds from commercial banks to the central government.
💡 Solution & Explanation
The Liquidity Adjustment Facility serves as the primary monetary policy instrument used by the Reserve Bank of India to modulate daily liquidity through repo and reverse repo auctions. Capital adequacy norms are governed separately by Basel regulations rather than the LAF framework.
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