Discover how the RBI manages financial liquidity using the Standing Facility and Liquidity Adjustment Facility (LAF) as key monetary policy tools

RBI’s Liquidity Intervention: Refinance and Liquidity Adjustment Facility (LAF)

• RBI’s Role in Liquidity Management

  • To manage the liquidity position in the financial system, the Reserve Bank of India (RBI) regularly intervenes in the money market either to absorb or inject liquidity based on current monetary needs.

  • Two key channels through which RBI intervenes are the standing facility or refinance and the Liquidity Adjustment Facility (LAF).

• Discount Window Support to Commercial Banks

  • Commercial banks facing liquidity shortages can borrow from the RBI via the discount window, using approved securities as collateral.

  • Eligible collateral includes commercial bills, government securities, treasury bills, and other eligible instruments.

• Sector-Specific Refinance Policy

  • In India, refinance support from the RBI has historically taken the form of providing liquidity against loans extended by commercial banks to specific sectors such as exports and agriculture.

  • Under this facility, banks could borrow a specified percentage (as determined by the RBI) of the loans given to targeted sectors.

  • The RBI used such sector-specific refinance facilities as a tool of credit policy to either encourage or restrict lending by adjusting the terms and conditions of refinance support.