Reserve Bank of India LAF Corridor New Definition 23Sep2025

Reserve Bank of India LAF Corridor New Definition 23Sep2025

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Abbreviation used:

 

LAF liquidity adjustment facility

MSF marginal standing facility

RBI Reserve Bank of India 

SDF standing deposit facility

WACR weighted average call rate 

 

 

What is LAF corridor?

And what is its significance?

Why did RBI introduce SDF rate? 

 

The article tries to explain the above briefly. 

 

 

1. LAF Corridor Prior to Apr2022:

Since May 2011, the Reserve Bank of India (RBI) had defined the interest rate corridor of the Liquidity Adjustment Facility (LAF) with the marginal standing facility (MSF) rate as the upper bound (ceiling), the fixed overnight reverse repo rate as the lower bound (floor) and the LAF policy repo rate positioned in between.

Upper bound (ceiling):   MSF rate
Mid-range rate:                Repo rate
Lower bound (floor):       Fixed reverse repo rate
 

While the MSF provided market participants access to central bank liquidity at a premium above the policy rate, the fixed rate overnight reverse repo window allowed surplus liquidity to be parked with the RBI at the end of the day at a discount below the LAF policy repo rate.

 

 

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Related blogs:

 

LAF Repo Rate: The Single Policy Rate 

 

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2. LAF Corridor Since Apr2022:

The above definition ended in Apr2022. Effective from Apr2022, RBI defines the LAF corridor as follows:

 

The RBI defines the LAF corridor with the marginal standing facility (MSF) rate as the upper bound (ceiling), the standing deposit facility (SDF) rate as the lower bound (floor) and the LAF policy repo rate positioned in the middle. 

 

The corridor is symmetric in the sense the SDF rate and MSF rate are 25 basis points away from the policy repo rate, acting as the lower and upper bounds of the corridor respectively. 

 

Since Apr2022, the fixed reverse repo rate was replaced with SDF rate as the floor.  

LAF corridor:

Upper bound (ceiling):   MSF rate
Mid-range rate:                Repo rate
Lower bound (floor):       SDF rate

 

Effectively, the current LAF corridor, as of 23Sep2025, is:

 

Upper bound (ceiling):   5.75% (MSF)
Mid-range rate:                5.50% (Repo)
Lower bound (floor):       5.25% (SDF)

 

Technically, the width of the LAF corridor is now 50 basis points (one percentage point equals 100 basis points), which is the difference between MSF and SDF rates.  


RBI Policy rates as of 23Sep2025 are:

Policy Repo Rate: 5.50%
Standing Deposit Facility Rate: 5.25%
Marginal Standing Facility Rate: 5.75%
Bank Rate: 5.75%
Fixed Reverse Repo Rate: 3.35%

3. Significance of LAF corridor:

 

The LAF Liquidity Adjustment Facility (LAF) corridor is a key monetary policy tool used by the RBI to manage short-term liquidity and guide interest rates in the economy. 

It is defined by the MSF rate as the ceiling and the SDF rate as the floor, with the repo rate at the middle. 

RBI manages liquidity using a corridor system with weighted average call rate (WACR) as the target rate.The overnight WACR is the operating target rate for RBI's liquidity operations 

This corridor ensures that the WACR stays within a defined range. By keeping the WACR contained, the corridor effectively transmits the RBI's monetary policy signals to the rest of the banking system. 

In essence, it acts as a tool to control short-term interest rate volatility and maintain stability of the monetary system. 

The WACR is expected to move and be contained within the LAF corridor,

 

4. Standing Deposit Facility (SDF) rate:

 

The Standing Deposit Facility rate serves as the floor of the LAF corridor and is used to manage excess liquidity in the financial system.

 

The SDF rate is always placed 25 basis points below the RBI's LAF Repo rate. This was instituted by RBI in Apr2022, when the definition of the LAF corridor was altered. 

 

While the MSF rate allows the RBI to inject liquidity into the banking system, the SDF enables it to absorb excess liquidity form banks. Together, these two standing facilities form the upper and lower bounds of the LAF corridor.

 

Notably, the MSF rate is 25 basis points above the Repo rate, while the SDF rate is 25 basis points below the Repo rate. In Apr2022, the width of the LAF corridor was restored to 50 basis points, and it has since been maintained at that level.

 

For brief period between COVID-19 outbreak in Mar2020 and Apr2022, RBI allowed the corridor to rise up to 200 basis points to manage the extraordinary situation back then.  

 

RBI introduced the collateral-free Standing Deposit Facility or SDF in Apr2022, following an amendment to Section 17 of the RBI Act, 1934 in 2018. This amendment empowered the RBI to offer a standing facility to banks without requiring any collateral on RBI's part.

 

The SDF helps the RBI to manage the banking liquidity system more effectively. 

 

 

5. Reverse Repo versus Standing Deposit Facility:

 

Under the reverse repo window, RBI absorbs liquidity from the banking system. While doing so, RBI has to provide collateral in the form of government securities to commercial banks. This is a constraint for RBI, because it may not have sufficient stock of government securities to offer as collateral to commercial banks. 

 

Now with the introduction of SDF in Apr2022, RBI can absorb excess liquidity, if any, from the banking systems without any collateral. 

 

To sum up, collateral requirements under reverse repo window limit the RBI’s operational scope during periods of high liquidity, while SDF removes this bottleneck and enables more efficient liquidity management. 

 

 

6. MSF versus SDF:

 

The RBI provides liquidity tools, MSF and SDF to banks. These facilities are used at the discretion of banks. In the case of MSF, banks have to provide collateral to RBI while accessing RBI funds; but RBI need not offer any collateral to banks while accepting deposits from banks through SDF route. 

But repo window, reverse repo window and OMO (open market operations) are at the discretion of the RBI. 

It is worth noting the SDF is not only a liquidity management tool, but also a financial stability tool. 

 

 

7. Bonus tip: 

 

The word "standing" in MSF and SDF means permanent, on-demand access to these liquidity tools for banks — making them predictable, reliable instruments in RBI’s liquidity management toolkit. This is standard terminology used by global central banks.  

 

(the blog is still work in progress; and the same shall be completed in the two to three hours; till then, please bear with me) 

 

 

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References: 

 

RBI governor statement 08Apr2022

 

Operating procedure of monetary policy 26Feb2021 - narrow versus wide LAF corridor, upper bound, lower bound and mid-range

 

Report of the Internal Working Group to Review the Liquidity Management Framework 06Aug2025