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RBI's liquidity framework: the LAF corridor, SDF, MSF and VRR auctions

By CAShorts DeskPublished Sources: RBI press releases (VRR and VRRR auctions, Money Market Operations, Monetary Policy Statement, Liquidity Management Framework); RBI monetary policy page

Why in news: On 19 October 2026 the RBI injected about ₹1 lakh crore through a 7-day variable rate repo auction and announced another for 21 October.

RBI's liquidity framework: the LAF corridor, SDF, MSF and VRR auctions
Illustration (AI-generated)

The Reserve Bank of India steers bank liquidity through the Liquidity Adjustment Facility (LAF): a corridor with the Standing Deposit Facility (SDF) rate as floor, the Marginal Standing Facility (MSF) rate as ceiling and the policy repo rate between, plus variable rate repo auctions. On 19 October 2026 it injected about ₹1 lakh crore through one.

Syllabus: GS3 · Indian Economy & Growth; Prelims · Economy & Social Development

Why this matters for UPSC

GS3 Indian economy, monetary policy: Prelims asks which rate forms the floor or ceiling of the LAF corridor and how the SDF and MSF work; Mains asks how liquidity management carries the repo rate to borrowers.

In short

Liquidity management is how the RBI keeps the overnight interbank rate near its policy repo rate, using the Liquidity Adjustment Facility corridor and discretionary auctions under the RBI Act, 1934.

The LAF corridor and itstoolsRepo rate in themiddleSDF as floorMSF as ceilingVRR auctionsinject liquidityVRRR auctionsabsorb liquidity

The corridor is sound; its success depends on the RBI reading liquidity early and switching tools quickly, so that its policy rate actually reaches borrowers.

Why it matters

When banks run short of cash, the rate at which they lend to each other overnight jumps, and loans to firms and households soon cost more even if the official rate has not moved. When cash is plentiful, that rate sinks and a rate rise meant to cool prices fails to reach borrowers. By adding or draining money through auctions and the two standing windows, the central bank keeps the everyday price of money close to the rate it has chosen, so its decisions reach people with home loans, savers with deposits and companies raising working capital. The larger question is how well monetary policy is transmitted when government spending, taxes and currency flows keep shifting money in and out of banks.

Prelims pointers

  • Operating target: the overnight WACR remains the operating target under the Revised Liquidity Management Framework (30 September 2025); the RBI also tracks other overnight money market rates.
  • SDF legal basis: the 2018 amendment of Section 17 of the RBI Act, 1934 empowered the RBI to absorb liquidity without collateral; the SDF began on 8 April 2022.
  • SDF balances do not count towards the cash reserve ratio (Section 42, RBI Act, 1934) but are eligible assets for the SLR (Section 24, Banking Regulation Act, 1949).
  • MSF limit: a bank may borrow against its excess SLR holdings plus up to 2 per cent of its net demand and time liabilities (NDTL) below the stipulated SLR.
  • Bank Rate: published under Section 49 of the RBI Act, 1934; it is the penal rate for shortfalls in CRR and SLR and is aligned with the MSF rate.
  • Durable liquidity tools: open market operations (OMOs), long-term variable rate repo and reverse repo beyond a fortnight, and forex swap auctions.
  • MPC: six members under Section 45ZB of the RBI Act, 1934; the Governor chairs and has a casting vote; quorum four; meets at least four times a year.
  • Before the 2025 revision, a 14-day variable rate repo or reverse repo auction (February 2020 framework) was the main operation for transient liquidity.

Practise a UPSC-style question

With reference to the Liquidity Adjustment Facility (LAF) corridor of the Reserve Bank of India, consider the following statements:

1. The Standing Deposit Facility rate has replaced the fixed rate reverse repo rate as the floor of the corridor.

2. Banks must pledge government securities with the RBI to place funds under the Standing Deposit Facility.

3. The Bank Rate is aligned with the Marginal Standing Facility rate and changes along with it.

Which of the statements given above is/are correct?

  1. (a) 1 and 2 only
  2. (b) 2 and 3 only
  3. (c) 1 and 3 only
  4. (d) 1, 2 and 3
Show the answer

Answer: (c) 1 and 3 only

Answer: (c) 1 and 3 only. The SDF is the uncollateralised floor, and the Bank Rate tracks the MSF rate.

Statement 1: correct. Since 8 April 2022 the SDF rate, not the fixed rate reverse repo rate, forms the floor of the LAF corridor.

Statement 2: incorrect. The SDF lets the RBI absorb liquidity without any collateral; that is its purpose under the 2018 amendment of Section 17 of the RBI Act, 1934.

Statement 3: correct. The RBI aligns the Bank Rate with the MSF rate, so it changes automatically when the MSF rate moves with the repo rate.

Eliminate: Statement 2 is the surest: the SDF needs no collateral. Out: (a), (b), (d).

Trap: Reversed direction. Collateral is needed when the RBI lends under repo; the SDF absorbs funds and is uncollateralised.

Remember: SDF floor, no collateral; MSF ceiling, with the Bank Rate beside it.

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