Liquidity Adjustment Facility (LAF)

The LAF answers a plumbing question that quietly shapes every loan EMI and FD rate in India: how does the RBI keep overnight interest rates near where it wants them, day after day? Banks always have either too much or too little cash at the end of a day, and the LAF is the set of windows through which the RBI lends to or borrows from them.

The corridor

The LAF defines a rate corridor with three rungs. The repo rate is the policy rate at which banks borrow from the RBI against government securities. Below it sits the Standing Deposit Facility (SDF), the floor where banks park surplus cash; above it sits the Marginal Standing Facility (MSF), the ceiling for emergency borrowing. In mid-2026 the repo rate stood at 5.25%, with the SDF and MSF forming a band roughly 25 basis points on either side. Crucially, since 2022 the SDF has replaced the old reverse repo as the main absorption tool, so the reverse repo rate, though still in the rulebook, is largely dormant.

Why it matters to you

When the RBI cuts the repo rate, banks' cost of funds falls and they can lend home and car loans cheaper, eventually nudging deposit rates down too. The MPC steers the policy rate, but the LAF is the machinery that transmits that decision into the real economy. Through 2025-26, with CPI inflation running near or below the RBI's 4% target, the central bank had room to ease.

The takeaway

For a saver or borrower, the LAF explains why your floating-rate loan reprices and why liquidity conditions, not just the headline repo rate, affect short-term debt fund returns. The RBI also uses variable-rate repo and reverse-repo auctions within this framework to fine-tune cash in the system. Watching the corridor tells you the direction of money's price better than any single headline number.