Q. Consider the following statements regarding Liquidity Adjustment Facility (LAF):
1.It is introduced as key element of fiscal policy to control money supply in the economy.
2.It is introduced in 2013 to face rupee exchange crisis.
Which of the statements given above is/are NOT correct?

[A] 1 only

[B] 2 only

[C] Both 1 and 2

[D] Neither 1 nor 2

Answer: C

Explanation: The LAF is the key element in the monetary policy operating framework of the RBI (introduced in June 2000).

  • On daily basis, the RBI stands ready to lend to or borrow money from the banking system, as per the need of the time, at fixed interest rates (repo and reverse repo rates).
  • Together with moderating the fund mismatches of the banks, LAF operations help the RBI to effectively transmit interest rate signals to the market.
  • The recent changes regarding a cap on the repo borrowing and provision of the term repo have changed the very dynamics of this facility after 2013.

Source: TMH Ramesh Singh