Towards this end, the Reserve Bank pursues, inter alia, a policy of active management of liquidity through open market operations including liquidity adjustment facility (LAF), market stabilisation scheme and cash reserve ratio, and deploys the policy instruments at its disposal, flexibly, as warranted by the situation.
Changes in fixed reverse repo/repo rates set by the Reserve Bank from time to time for the conduct of its LAF, under which the central bank conducts daily auctions for the banks, have emerged as the main instruments for interest rate signaling in the Indian economy. Institutional mechanisms have been evolved in parallel to improve transparency and communication of monetary policy.