The full form of LAF is Liquidity Adjustment Facility.
The Liquidity Adjustment Facility (LAF) is a monetary policy instrument used by the Reserve Bank of India (RBI) to manage liquidity conditions in the banking system. It essentially allows banks to borrow money through repurchase agreements (repos) or lend money to the RBI through reverse repos. This helps the RBI influence the money supply and maintain stability in the financial markets. The LAF was introduced based on recommendations from the Narasimham Committee on Banking Sector Reforms in 1998.
Here's a breakdown:
- Liquidity: Refers to the availability of cash or easily convertible assets in the market.
- Adjustment: Implies making changes or corrections to maintain the desired level.
- Facility: Denotes a mechanism or tool used for a specific purpose.
In essence, LAF is a tool to adjust the liquidity in the market.
