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Liquidity Adjustment facility by RBI allows a. RBI to manage market liquidity on a daily basis. b. Transmit interest rate signals to the market. Which of the statements given above is/are correct?

Liquidity Adjustment facility by RBI allows a. RBI to manage market liquidity on a daily basis. b. Transmit interest rate signals to the market. Which of the statements given above is/are correct? Correct Answer Both a and b

The correct answer is option 3, i.e. Both a and b.

  • A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI).
  • It allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements. 
  • The Liquidity Adjustment Facility is a tool used by RBI to transmit signals of interest rates to the market and monitor liquidity.
  • Banks continue to manage day-to-day cash with the RBI.
  • Based on the current CRR requirement, which is 4 per cent, the quarterly calculation of what banks are required to set aside.

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