The RBI's main day-to-day liquidity-management tool, under which banks borrow from or park funds with the central bank against government securities, defining the short-term interest-rate corridor.
- Introduced in 2000, the LAF lets the RBI inject liquidity through repo (lending to banks) and absorb it through reverse repo or the standing deposit facility.
- The corridor has the MSF rate as its ceiling, the SDF rate as its floor, and the concept repo rate as the central policy rate in between.
- Operations include overnight and variable-rate term repo and reverse-repo auctions; the weighted average call rate is the operating target the RBI tries to keep near the repo rate.
- It manages frictional, short-term liquidity, while open market operations manage durable, longer-term liquidity.
- The LAF is a price-based instrument of concept monetary policy, working alongside the quantity-based CRR and SLR.
The LAF corridor structure (MSF ceiling, repo centre, SDF floor) and the repo-versus-reverse-repo distinction are recurring monetary-policy items.
LAF (short-term, frictional liquidity, a corridor) versus OMO (durable liquidity through outright G-sec buying or selling); the repo rate is the centre of the corridor, not its ceiling.
RBI's day-to-day liquidity window using repo and reverse repo; corridor of MSF (ceiling), repo (centre) and SDF (floor).