What is liquidity adjustment facility?

Q4: That is a couple of terms that we have got out of the way. Just to get a few more of these, there is the cash reserve ratio (CRR) which is increasingly become important or the cash reserve ratio as also liquidity adjustment facility (LAF)?

A: The repo rate at which banks actually supply funds to the Reserve Bank of India. The repo rate at which banks borrow from the Reserve Bank of India so this entire repo-reverse repo operation where essentially comes under the liquidity adjustment facility framework. There is nothing complicated about it. The repo, reverse repo borrowing by the banks or lending by banks to the Reserve Bank of India is called the liquidity adjustment facility.

The CRR or the cash reserve ratio is basically a liquidity ratio. Banks have to have some risk, some capital cash in place from a systemic risk management perspective, there are two key ratios for this - the statutory liquidity ratio which is around 23 percent of net demand and time liabilities for banks that is nothing but banks overall deposits.

The cash reserve ratio, this is the money that banks have to hold as cash deposits with the Reserve Bank of India. The 23 percent SLR which is the banks money in the form of government bonds and the four percent CRR which the banks holding of cash balances with the Reserve Bank of India these together basically forms some sort of protection for the banks from a systemic basis, enough liquidity from their balance sheet management perspective.