Introduced by the Reserve Bank of India on June 5, 2000, the Liquidity Adjustment Facility, or LAF, has undergone a remarkable transformation. Initially conceived as a mechanism to help banks manage short-term liquidity mismatches and to provide a corridor for overnight interest rates, the LAF has since evolved into a cornerstone of India’s monetary operations, serving both as a tool for liquidity management and often as a signal of the RBI’s policy stance.The broader economic reforms of the 1990s, which aimed to shift India from a dirigiste to a more market-oriented economy, required bold steps in interest rate deregulation.
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