RBI’s LAF Corridor Simplified: SDF, MSF & All That Jazz 23Sep2025

RBI’s LAF Corridor Simplified: SDF, MSF & All That Jazz 23Sep2025

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(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)

 

 

Abbreviations 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?

Difference between Reverse repo and SDF?

MSF versus SDF? 

 

 

The article tries to explain the above briefly, includes a bonus tip also. 😁

 

 

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

 

Primer on Market Stabilisation Scheme (MSS) and Liquidity Management

 

Bank Rate: Is It Relevant Now? 

 

What is Marginal Standing Facility (MSF)? 

 

Update on Marginal Standing Facility (MSF) 

 

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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.  

 

In Apr2022, RBI changed the definition of the LAF corridor and simultaneously introduced SDF -- which removed the RBI's constraint of compulsory collateral for liquidity absorption (more on SDF in Section 4 below).  

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

 

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

 

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.  

The WACR is expected to move and be contained within the LAF corridor. By keeping the WACR in a tight range of 50 basis points, the RBI tries to convey its monetary policy signals to the economic agents in the financial system.

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

 

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 a brief period between Mar2020 (COVID-19 outbreak)  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, at times, 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 system 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.  

 

 

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References: 

 

Above image courtesy: Google Gemini 

 

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 

 

RBI Hikes Repo and Reverse Repo Rates 20Mar2010 

 

RBI Monetary Policy Instruments / tools 

 

PIB Press Release 06Jun2025 (PDF form) - Direct and indirect monetary policy tools used by RBI are:

 

Repo rate

MSF rate

SDF rate

LAF

LAF corridor 

Reverse repo rate

Bank rate

CRR

SLR 

14-day term repo / reverse repo auctions

OMOs or open market operations 

 

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Disclosure:  I've got a vested interest in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.

Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.

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LAF Repo Rate: The Single Policy Rate-VRK100-23Jul2013

  

Rama Krishna Vadlamudi, HYDERABAD      23 July 2013
www.ramakrishnavadlamudi.blogspot.com

As shown in the above graph, Repo Rate under RBI’s Liquidity Adjustment Facility (LAF) has been declining indicating the gradual easing of monetary policy stance by RBI following the moderation of inflationary pressures.

Before the introduction of revised operating monetary policy in May 2011, Reserve Bank of India (RBI) had been using various monetary instruments to signal the monetary policy stance. Since May 2011, RBI has been using Repo Rate as the single policy rate and all the other policy rates are linked to the Repo Rate. Rates that are linked directly to Repo Rate are: Reverse Repo Rate and Marginal Standing Facility (MSF) Rate. Bank Rate is indirectly linked to Repo Rate. Reverse Repo rate is kept at 100 basis points (or one percentage point) below Repo Rate.

Short-term interest rates represented by call money rates and CBLO rates are supposed to move in a range between the Repo Rate and the Reverse Repo Rate. LAF Corridor is the excess of LAF-Repo Rate over the LAF-Reverse Repo Rate. The objective of RBI is to keep the short term interest rates in the banking system within this LAF corridor.

Timeline for LAF Repo Rate:

The following is a timeline of Liquidity Adjustment Facility (LAF) and Repo Rate:

April 1998	The Narasimham Committee II on Banking Sector Reforms recommended introduction of LAF
5 June 2000	RBI introduced a full-fledged LAF
16 Aug. 2004	One-day fixed rate reverse repo was re-introduced while continuing with the 7-day and 14-day reverse repos and overnight fixed rate repos
29 Oct. 2004	The nomenclature of repo and reverse repo were interchanged as per international usage
1 Nov. 2004	The 7-day fixed rate and 14-day variable reverse repos were phased out and the LAF was operated through overnight fixed rate repo & reverse repo

Salient Features of RBI’s LAF:

Ø  Liquidity Adjustment Facility (LAF) is a facility by which the RBI adjusts the daily liquidity in the domestic markets (India) either by injecting funds or by withdrawing them out

Ø  The LAF enables the RBI to smoothen short-term liquidity under varied financial market conditions, ensuring stable conditions in the overnight (call) money market

Ø Repo denotes injection of liquidity by RBI against collateral of eligible instruments. Repo rate is the rate at which RBI lends overnight funds to banks.

Ø Reverse Repo denotes absorption of liquidity by RBI against collateral of eligible instruments. Under Reverse repo, banks park their surplus overnight funds with the RBI and the RBI pays interest to banks at the Reverse repo rate.

Ø Both the Repo and Reverse Repo operations are conducted at a fixed rate

Ø The Repo rate is fixed by RBI from time to time. At present, Repo rate is 7.25 percent. Reverse Repo rate is pegged at 100 basis points below the Repo rate and as such the current Reverse Repo rate is 6.25 percent.

Ø  All Scheduled Commercial Banks (excluding Regional Rural Banks) and Primary Dealers are permitted to participate in Repo and Reverse Repo auctions

Ø   The minimum bid size will be Rs 5 crore and in multiples of Rs 5 crore thereafter

Ø  The LAF avoids targeting a particular level of overnight money market rate due to external factors impacting short-term liquidity, such as volatile government cash balances and unpredictable foreign exchange flows

Ø Repos and Reverse Repos are undertaken in all SLR-eligible transferable Government of India Dated Securities/Treasury Bills

Ø A margin of five percent is required for the above eligible securities. The amount of securities offered or tendered on acceptance of a bid for Rs.100 will be Rs.105 in terms of face value.

Ø In this direction, the LAF introduced in June 2000 has now emerged as the principal operating instrument of monetary policy

RBI’s Measures to Curb Exchange Rate Volatility:

The measures concerning LAF taken by RBI on 15Jul2013 to rein in rupee volatility are:

ü   The MSF rate has been readjusted to 300 basis points (from the earlier 100 basis points) above the policy Repo rate under the Liquidity Adjustment Facility (LAF). As such, the MSF rate is raised to 10.25 per cent from 8.25 percent with effect from 16Jul2013.

ü   With effect from 17Jul2013, the total amount under RBI’s LAF is restricted to one percent of the net demand and time liabilities (NDTL) of the banking system, reckoned as Rs 75,000 crore (Earlier, there was no such quantitative restriction)

Additional measures concerning LAF taken by RBI on 23Jul2013 to curb rupee volatility are:

ü The overall limit for access to LAF by each individual bank is set at 0.5 per cent of its own NDTL. This measure will come into effect immediately, i.e., from 24 July 2013 and will remain in force until further notice.

ü The earlier instructions issued by RBI on 15Jul2013 regarding cap on overall allocation of funds at Rs 75,000 crore under LAF stand withdrawn

LAF Repo Rate: The Single Policy Rate:

As part of the Deepak Mohanty Committee Report (March 2011) on the operating procedure of the monetary policy, the RBI in its Annual Policy statement 2011-12 made the following important changes with effect from 03 May 2011*:

1  The weighted average overnight call money rate will be the operating target of monetary policy of the RBI

2 There will henceforth be only one independently varying policy rate and that will be the repo rate. The transition to a single independently varying policy rate is expected to more accurately signal the monetary policy stance.

All central banks have a single policy rate for liquidity and monetary management. Now, RBI too is following the international norm of a single policy rate. All the refinance facilities (e.g., export refinance and general refinance) provided by RBI are at the Repo Rate. At present, Repo Rate has emerged as the single policy rate to unambiguously signal the stance of monetary policy to achieve macroeconomic objective of growth with price stability.

(* Before 03May2011, RBI was using both LAF Repo rate and LAF Reverse Repo rate as policy rates to signal monetary policy actions).

To Sum Up:

The RBI has over the years has used a variety of direct and indirect instruments to signal monetary policy actions. Prior to late 1990s, monetary policy was conducted with the help of direct instruments, such as, SLR, CRR, and selective credit control.

In an effort to move away from direct instruments of monetary control to indirect instruments in a market-based economy, a fundamental change in the conduct of monetary policy in India was effected through the introduction of LAF in June 2000. Since then, the LAF scheme has evolved in a series of steps taken by RBI to move towards monetary management based on short-term market interest rates.

With the adoption of Deepak Mohanty Committee recommendations, LAF Repo rate has become the single policy rate and overnight call monetary rate has become the operating target for conducting monetary policy in India. 

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Annexure 1:

Direct instruments of monetary control used by RBI in the past were:

§       Prescribing deposit and lending rates of commercial banks

§       Selective credit control over sensitive commodities

§       Sector-specific standing facilities

§       Statutory liquidity ratio (SLR) & Cash reserve ratio (CRR); and

§       Bank Rate

Indirect monetary policy instruments  are:

§       Open market operations (OMO)

§       Purchase and repurchase of government securities

§       LAF Repo rate and Reverse Repo rate

§       Marginal Standing Facility Rate (MSF)

§       Market Stabilization Scheme or MSS (used for sterilization of large capital flows)

Notes: CBLO-Collateralized Borrowing and Lending Obligation of the Clearing Corporation of India Limited. It is a money market instrument through which CCIL imparts liquidity to market participants.

Reference: Report of the Deepak Mohanty committee, other RBI reports and Paper by Rakesh Mohan on Monetary Policy Transmission,

Disclaimer: The author is an investment analyst and freelance writer. His articles on financial markets and Indian economy can be reached at:

http://ramakrishnavadlamudi.blogspot.in/ and www.scribd.com/vrk100

RBI Raises Interest Rates-VRK100-16Sep2011

RBI Raises Interest Rates

Mid-Quarter Monetary Policy of September 2011

As expected by the markets, the Reserve Bank of India has raised interest rates by another 25 basis points (0.25 per cent). The policy rate, that is Repo rate under RBI’s Liquidity Adjustment Facility, is increased to 8.25 per cent. Since March 2010, RBI has hiked interest rates by 350 basis points and that too twelve times in succession. However, markets had expected that RBI would tone down its stance on dear money policy. In its latest review, RBI has continued with its hawkish stance.

Despite several rate hikes, the inflation rate – close to 10 per cent now – has continued to be stubborn even though GDP growth and industrial production growth are slowing down. What is complicating matters for RBI is yesterday’s decision by the Government of India to hike retail petrol prices by Rs 3.14 per litre – this is the third hike in retail fuel prices in this calendar year. The question on everyone’s mind is whether RBI will stop raising interest rates further. The RBI will be watching the macro economic indicators and global developments closely before making further moves on policy rates.

RBI Policy Decision

The Repo rate (under its Liquidity Adjustment Facility or LAF) is the benchmark policy interest rate for the RBI. The RBI has raised its Repo rate by 25 basis points (0.25 per cent) to 8.25 per cent when it announced the mid-quarter monetary policy on 16 September 2011. The new rate is with immediate effect. The Reverse Repo rate under LAF and the interest rate under Marginal Standing Facility are linked to Repo rate. As such, both the Reverse Repo rate and Marginal Standing Facility rate stand increased to 7.25 per cent (one per cent below Repo rate) and 9.25 per cent (one per cent above Repo rate) respectively with immediate effect.

Twelfth Rate Hike Continuously

Since March 2010, RBI has been increasing the interest rates continuously and the latest increase is twelfth in the series. The RBI’s Repo rate hikes started from 4.75 per cent and the rate is now at 8.25 per cent, an increase of 350 basis points. In the last decade, the highest Repo rate was 9 per cent that existed from the end of July 2008 till September 2008 when Lehman Brothers collapsed.

Date	20-Mar-2010	20-Apr-2010	3-Jul-2010	27-Jul-2010	17-Sep-2010	2-Nov-2010
Rate %	5.00	5.25	5.50	5.75	6.00	6.25
Date	25-Jan-2011	17-Mar-2011	3-May-2011	16-Jun-2011	26-Jul-2011	16-Sep-2011
Rate %	6.50	6.75	7.25	7.50	8.00	8.25

Source: RBI

Rationale for Rate Hikes

What is the rationale behind RBI’s latest increase in rates?

v     Inflation rate of 9.8 per cent (for the month of August 2011 based on wholesale price index-WPI) remains at highly elevated levels for the past 11 months due mainly to high commodity prices and supply chain bottlenecks

v     This calendar year, fuel prices have been increased by Government of India three times. Retail petrol prices have been increased by Rs 8 per litre in the last four months. The impact of the fuel price hike is yet to play out fully in the economy.

v     Non-food manufactured goods prices too are rising

Impact

The present rate hike from RBI is on the expected lines. However, it was expected by the markets that the RBI would change its policy stance. Contrary to expectations, there is no change in RBI’s hawkish monetary policy. The stock markets were one per cent up seconds before the RBI’s rate hike. As soon as the RBI hiked the repo rate, the markets had suddenly collapsed and went into negative for a few minutes. But, later they recovered from their low levels and at the time of writing, the Sensex is at 16,990 and the Nifty is at 5,100.

The bond market too reacted negatively, though in a mild manger, to the RBI rate hike. Seconds after the RBI rate hike, the yield on the benchmark 7.80 per cent 10-year Government of India security maturing in 2021 is quoting at around 8.36 per cent from the old level of 8.32 per cent. Overall, the outlook for bond market is negative.

Banks will wait for some time to raise either deposit or lending rates – though one cannot rule out the possibility of some private banks raising interest rates immediately. Depending on liquidity conditions and various other factors, Banks will wait for some more time before taking the plunge. The overall impact of relentless increase in interest rates will be negative for the stock market as well the bond market.

Outlook on Further Rate Hikes

The macro economic indicators are presenting a mixed picture as of now. The first quarter GDP (April-June 2011) growth is at 7.7 per cent, showing a continuous decrease for the last six quarters. The Index of Industrial Production for July 2011 indicates that the overall industrial production has recorded a growth of 3.3 per cent, which is the lowest in 21 months. The investment cycle too has slowed down. The GDP estimates and IIP figures are clearly indicating that the growth rate in India is slowing down.

On the contrary, the inflation rate remains at elevated levels. Food inflation too is not under control. The Government of India has raised fuel prices three times in the current calendar year. The higher fuel prices are feeding into inflation figures. The inference is that RBI wants to keep its primary focus on inflation control despite signs of GDP growth slowing down. RBI continues with its current hawkish stance.

However, the apprehensions regarding the effectiveness of monetary policy in containing growth-induced inflation remain unanswered at this point of time. But, RBI claims that its rate hikes are having some impact on inflation, though not up to their expectations. Inflation seems to have been caused more by supply chain bottlenecks, substantial increases in personal wealth and huge Government spending in the last three to four years.

The subsidy burden of diesel, LPG and kerosene is too heavy for the Government and to keep the fiscal deficit under control, it is raising fuel prices as India imports 82 per cent of its crude oil needs. It will take some more time for the fuel price to fully reflect in inflation figures. There is no significant cut in Brent crude oil prices in the last three months and the outlook for crude oil prices remains hazy. The Government’s disinvestment programme is in a limbo as it is not able to raise any money through selling of small stakes in government companies. Due to weak market conditions and doubts about getting attractive issue price, the Government has now postponed the stake sale in ONGC, the public sector oil company.

The monsoon is good till now and is expected to be normal this year. However, what needs to be emphasized is that RBI will be keenly watching the important data, like, inflation, GDP growth, IIP numbers, fiscal deficit, crude oil & other commodity prices, global cues especially from the crisis-ridden euro zone and others before making further moves on its fight against inflation monster.

Important Terms Explained

Repo rate: The overnight rate at which banks borrow money from RBI by pledging                  Government securities with RBI

Reverse Repo rate: The overnight rate given by RBI to banks when the latter keep                     their surplus funds with RBI (one per cent below Repo rate)

Marginal Standing Facility (MSF): Banks can borrow overnight from the RBI’s MSF                            up to one per cent of their respective net demand and time liabilities or                        NDTL. The rate of interest on amounts accessed from this facility will be            

                 100 basis points (one per cent) above the repo rate.

LAF  – RBI’s Liquidity Adjustment Facility

RBI   – Reserve Bank of India

GDP  – Gross Domestic Product or national income

IIP     – Index of Industrial Production

Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. There is a risk of loss in equity investments. Investors need to consult their certified financial adviser before making any investment decisions.

Note on author: The author in an investment analyst and writes copiously on financial markets – equities, bonds, currencies, taxes, Indian economy, etc. You can read these articles on:

www.ramakrishnavadlamudi.blogspot.com

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