Question:
Liquidity Adjustment Facility (LAF) uses the following instruments:
Liquidity Adjustment Facility (LAF) uses the following instruments:
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The main instruments used in Liquidity Adjustment Facility (LAF) are Repo Rate and Reverse Repo Rate, which control short-term liquidity in the economy.
Updated On: Nov 21, 2025
- Call Money Rate and Mumbai Inter-bank Offered Rate
- Repo Rate and Reverse Repo Rate
- Bank Rate and Statutory Liquidity Ratio
- Cash Reserve Ratio and Prime Lending Rate
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The Correct Option is B
Solution and Explanation
Step 1: Understand Liquidity Adjustment Facility (LAF).
LAF is a monetary policy tool used by central banks to manage short-term liquidity in the banking system. In India, the Reserve Bank of India (RBI) uses LAF to absorb or inject liquidity. The two key instruments under LAF are the Repo Rate and Reverse Repo Rate.
Step 2: Evaluate each option.
Option (A): Incorrect, Call Money Rate and Mumbai Inter-bank Offered Rate are not part of LAF instruments.
Option (B): Correct, LAF uses Repo Rate (the rate at which the RBI lends to commercial banks) and Reverse Repo Rate (the rate at which banks park excess funds with RBI).
Option (C): Incorrect, Bank Rate and Statutory Liquidity Ratio (SLR) are not part of LAF instruments.
Option (D): Incorrect, Cash Reserve Ratio (CRR) and Prime Lending Rate are not related to LAF instruments.
Thus, the correct answer is (B).
LAF is a monetary policy tool used by central banks to manage short-term liquidity in the banking system. In India, the Reserve Bank of India (RBI) uses LAF to absorb or inject liquidity. The two key instruments under LAF are the Repo Rate and Reverse Repo Rate.
Step 2: Evaluate each option.
Option (A): Incorrect, Call Money Rate and Mumbai Inter-bank Offered Rate are not part of LAF instruments.
Option (B): Correct, LAF uses Repo Rate (the rate at which the RBI lends to commercial banks) and Reverse Repo Rate (the rate at which banks park excess funds with RBI).
Option (C): Incorrect, Bank Rate and Statutory Liquidity Ratio (SLR) are not part of LAF instruments.
Option (D): Incorrect, Cash Reserve Ratio (CRR) and Prime Lending Rate are not related to LAF instruments.
Thus, the correct answer is (B).
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