Q. With reference to the Liquidity Adjustment Facility (LAF), consider the following statements:
1.The LAF allows the RBI to manage liquidity in the banking system on a daily basis through repo and reverse repo operations.
2.Under the reverse repo operation, banks borrow funds from the RBI by pledging securities at a fixed interest rate.
Which of the statements given above is/are correct?
Answer: A
Notes:
Explanation:
- The LAF is a daily liquidity management tool, allowing the RBI to lend or borrow via repo (inject liquidity) and reverse repo (absorb liquidity)
- Under reverse repo, it is the RBI that borrows funds from banks, not the other way around. This helps drain excess liquidity from the system.
Source: Indian Economy (Dr. Ramesh Singh)
