c
m
  


   

A tool used in monetary policy that allows banks to borrow money through repurchase
agreements. This arrangement allows banks to respond to liquidity pressures and is used by
governments to assure basic stability in the financial markets.

J  

 m
   

   
Liquidity adjustment facilities are used to aid banks in resolving any short-term cash
shortages during periods of economic instability or from any other form of stress
caused by forces beyond their control. Various banks will use eligible securities as
collateral through a repo agreement Liquidity Adjustment Facility (LAF) was introduced by RBI
during June, 2000 in phases, to ensure smooth transition and keeping pace with technological
upgradation. On recommendations of an RBI¶s Internal Group RBI has revised the LAF scheme
on March 25, 2004. Further revision has been carried wef Oct 29, 2004. The revised LAF scheme
has the following features:
^
 The funds under LAF are used by the banks for their day-to-day mismatches in
liquidity.
 :Under the scheme, Reverse Repo auctions (for absorption of liquidity) and Repo auctions
(for injection of liquidity) are conducted on a daily basis (except Saturdays). 7-days and 14-days
Repo operations have been discontinued wef Nov 01, 2004.
 : All commercial banks (except RRBs) and PDs having current account and SGL
account with RBI.
    : Rs. 5 cr and in multiple of Rs.5 cr
  Repos and Reverse Repos in transferable Central Govt. dated securities and
treasury bills.

J The reverse repo rate will be fixed by RBI from time to time (presently 5.25%).
The repo rate (presently 6.25% wef Oct 26, 2005) will continue to be linked to the reverse repo
rate and the spread between the repo rate and the reverse repo rate which was reduced to 150
basis points with effect from March 29, 2004 has been reduced further to 100 basis points.
 JUnder the revised Scheme, RBI will continue to have the discretion to
conduct overnight reverse repo or longer term reverse repo auctions at fixed rate or at variable
rates depending on market conditions and other relevant factors. RBI will also have the discretion
to change the spread between the repo rate and the reverse repo rate as and when appropriate.
(As per an IMF 1997 publication, ³the sale and repurchase transactions (reverse repo), are sales
of assets by the central bank under a contract providing for their repurchase at a specified price
on a given future date; they are used to absorb liquidity´. On the contrary, prior to above change,
in the Indian context, ³repo´ denotes liquidity absorption by the Reserve Bank and ³reverse repo´
denotes liquidity injection).

and will use the funds to alleviate their short-term requirements, thus remaining stable