RBI's Liquidity Adjustment Facility (LAF) is the primary monetary policy tool for daily liquidity management. It includes repo (liquidity injection), reverse repo (liquidity absorption), Marginal Standing Facility (MSF) for emergency borrowing, and Standing Deposit Facility (SDF) replacing reverse repo from April 2022. Banks can borrow/lend overnight funds within specified corridors. Current repo rate is 6.50%, SDF at 6.25%, MSF at 6.75%. LAF operations occur daily except Sundays and holidays, helping RBI maintain price stability and adequate liquidity.

LAF represents RBI's operational framework for implementing monetary policy through daily liquidity management. The repo rate serves as the policy anchor - when RBI lends to banks against government securities, it injects liquidity into the banking system. Conversely, SDF allows RBI to absorb excess liquidity without collateral requirements, replacing the earlier reverse repo mechanism. MSF provides a safety valve for banks facing acute liquidity stress, allowing borrowing up to 1% of NDTL above the repo rate. This corridor system creates a band within which call money rates fluctuate, ensuring effective transmission of policy rates to market rates. The SDF's introduction in April 2022 marked a significant shift - unlike reverse repo which required collateral, SDF is uncollateralized, giving RBI greater operational flexibility. Banks' participation in LAF auctions reveals market liquidity conditions and helps RBI gauge the effectiveness of its monetary stance. The facility's design ensures that short-term interest rates remain within the policy corridor, maintaining financial stability while allowing RBI to respond to changing liquidity conditions through variable rate operations or fine-tuning measures.