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Indianmoney Market

Money Markets

Call Money

Liquidity Adjustment Facility

Important signals for the interest rate changes and the prominent tools useful for the liquidity management in the Indian money market are the bank rates, CRR and repo rate changes. In this direction the Liquidity Adjustment Facility (LAF) by the RBI has been an effective mechanism in the RBI’s liquidity management scheme where it can absorb or inject liquidity on a day-to-day basis in a very flexible way, which in turn provides a passage for the call money market. The RBI in its monetary and credit policy of April, 2000 announced the introduction of the LAF (Liquidity Adjustment Facility). The Scheme of Liquidity Adjustment Facility (LAF) will include (i) Repo Auctions and (ii) Reserve Repo auctions.

As per the scheme, Repo and Researve Repo auctions will be conducted on a daily basis except for Saturdays. The Repo tenor is one day except for the holidays and the Fridays. To account for the following Saturday and Sunday the maturity of auctions on Friday will be three days. The funds available to the banks under the facility are supposed to be used by them to even out the day-to-day imbalances in liquidity.

As per the policy statement the RBI has taken the launch of LAF in three convenient and progressive stages so as to ensure a smooth transition. In the first stage variable rate Repo auctions with the same day settlement were introduced replacing the Additional Collateralized Lending Facility (ACLF) to banks and Level II support to Primary Dealers (PDs). In the second stage of the scheme Collateralized Lending Facility (CLF) to banks and Level I support to PDs is to be replaced by variable rate Repo auctions. It was indicated that the effective date for the second stage would be decided in consultation with banks and PDs.

As the market developed most of the constraints in the operations of the LAF were removed. Hence the RBI is trying to make LAF much more efficient. On the basis of the...