What instruments does the RBI use under the Liquidity Adjustment Facility to manage durable versus transient liquidity surpluses?

The Liquidity Adjustment Facility (LAF) is the RBI's principal operating framework for keeping the weighted average call rate close to the policy repo rate, within a corridor bounded by the Standing Deposit Facility (SDF) as floor and the Marginal Standing Facility as ceiling [1]. Its absorption toolkit is deliberately split by the duration of the surplus.

Instruments for transient (frictional) surpluses

• Standing Deposit Facility: uncollateralised, bank-initiated overnight window forming the corridor floor; mops up residual end-of-day balances [1].
• Main operation: the variable rate reverse repo (VRRR) auction of 7-day/14-day tenor, the primary instrument for aligning system liquidity with the monetary policy stance [1].
• Fine-tuning VRRRs: overnight to 3-day auctions when surpluses spike — on 4 September 2026 the RBI absorbed over ₹6.02 lakh crore through two 3-day VRRRs [4], the same tenor-specific technique used in earlier auctions under LAF [2].
• Cut-offs are market-discovered, nudging money-market rates back toward the repo rate rather than administering them.

Instruments for durable surpluses (beyond the LAF proper)

• Outright OMO sales of government securities — a permanent withdrawal of rupee liquidity [1].
• Sell-buy forex swaps, which reverse the rupee injection caused by dollar purchases [1].
• Market Stabilisation Scheme bills, designed precisely to sterilise capital-inflow-driven liquidity [1].
• CRR increases — a blunt statutory instrument used sparingly.

Why the distinction matters today

• The special USD-INR swap facility mobilised $136.38 billion by 31 August 2026, of which $127.23 billion came via FCNR(B) deposits [3] — a durable rupee injection that pushed the system surplus to about ₹10.32 lakh crore [4].
• Short-tenor VRRRs merely roll such a surplus forward; if left unabsorbed it drags call rates below the repo rate and weakens transmission [1].

Thus the LAF is a graded, duration-matched toolkit: standing facilities and VRRRs for frictional mismatches, OMOs, swaps and MSS for durable ones. As inflow-driven surpluses persist, a calibrated shift toward durable instruments — as the framework itself envisages — would preserve corridor discipline and strengthen monetary transmission.