RBI liquidity framework review 2025 enhances monetary policy transmission by phasing out 14-day repos, retaining WACR as policy target, and inviting public comments for robust financial stability.
RBI Reviews Liquidity Framework to Strengthen Rate Control
Introduction: RBI’s Strategic Review of Liquidity Management
In August 2025, the Reserve Bank of India (RBI) unveiled a comprehensive review of its Liquidity Management Framework (LMF), aiming to enhance the transmission of monetary policy and stabilize short-term interest rates. This initiative underscores the RBI’s commitment to refining its tools for effective economic governance.
Key Recommendations from the Internal Working Group
The Internal Working Group (IWG), tasked with assessing the LMF, proposed several pivotal changes:
- Phasing Out 14-Day Variable Rate Repo Operations: The IWG recommended discontinuing the 14-day variable rate repo and reverse repo operations, which have been central to liquidity management since 2020. Banks have expressed reluctance to lock surplus funds for extended periods, prompting this shift.
- Retention of WACR as Policy Target: The IWG emphasized maintaining the overnight Weighted Average Call Rate (WACR) as the operative target for monetary policy. WACR’s strong correlation with other overnight money market rates ensures effective transmission of policy signals.
- Continued Use of Variable Rate Auctions: The group advocated for the continuation of variable rate repo and reverse repo auctions to align the WACR with the policy repo rate, thereby facilitating smoother liquidity management.
Public Consultation and Stakeholder Engagement
Following the release of the IWG’s report, the RBI has invited public comments until August 29, 2025. This inclusive approach ensures that the perspectives of various stakeholders are considered before finalizing any amendments to the LMF.
Conclusion: Strengthening Monetary Policy Transmission
The proposed revisions to the LMF reflect the RBI’s proactive stance in adapting to evolving economic conditions. By refining its liquidity management tools, the RBI aims to enhance the effectiveness of monetary policy, ensuring stable economic growth and financial stability.
Why This News is Important
Enhancing Monetary Policy Effectiveness
The RBI’s review of its Liquidity Management Framework is crucial for improving the transmission of monetary policy. By aligning short-term interest rates with policy rates, the central bank can more effectively influence borrowing costs and economic activity.
Addressing Market Liquidity Concerns
The proposed changes, such as phasing out the 14-day variable rate operations, aim to address concerns raised by banks about liquidity management. This responsiveness to market needs demonstrates the RBI’s commitment to maintaining financial stability.
Ensuring Stakeholder Participation
The RBI’s invitation for public comments underscores its dedication to transparency and stakeholder engagement. Incorporating diverse viewpoints ensures that the revised framework is comprehensive and balanced.
Supporting Economic Growth
By refining its liquidity management tools, the RBI seeks to create an environment conducive to economic growth. Stable and predictable monetary conditions encourage investment and lending, driving economic development.
Maintaining Financial Stability
The proposed adjustments to the LMF are designed to enhance the stability of the financial system. Effective liquidity management helps prevent market disruptions and ensures the smooth functioning of financial markets.
Historical Context
Evolution of RBI’s Liquidity Management Framework
The RBI’s approach to liquidity management has undergone significant transformations over the years. In February 2020, the central bank introduced a revised Liquidity Management Framework to simplify operations and enhance the effectiveness of monetary policy.
Previous Adjustments and Market Responses
Prior to the current review, the RBI had implemented various measures to address liquidity concerns, including the introduction of variable rate repo and reverse repo operations. These adjustments were in response to evolving market dynamics and the need for more flexible liquidity management tools.
Ongoing Commitment to Policy Refinement
The ongoing review of the LMF reflects the RBI’s continuous efforts to refine its policies in response to changing economic conditions. This commitment to policy refinement ensures that the central bank remains responsive to the needs of the economy and the financial system.
Key Takeaways from “RBI Reviews Liquidity Framework to Strengthen Rate Control”
| S.No. | Key Takeaway |
|---|---|
| 1. | Phasing Out 14-Day Repo Operations: The RBI plans to discontinue 14-day variable rate repo and reverse repo operations. |
| 2. | Retention of WACR as Policy Target: The overnight Weighted Average Call Rate (WACR) will continue as the operative target for monetary policy. |
| 3. | Continued Use of Variable Rate Auctions: The RBI will maintain variable rate repo and reverse repo auctions to align short-term interest rates with policy rates. |
| 4. | Public Consultation Invited: Stakeholders are encouraged to submit comments on the proposed changes until August 29, 2025. |
| 5. | Objective of Enhanced Monetary Policy Transmission: The revisions aim to improve the transmission of monetary policy signals to the broader economy. |
FAQs: Frequently Asked Questions
1. What is the Liquidity Management Framework (LMF) of RBI?
The Liquidity Management Framework is a set of tools and policies used by the Reserve Bank of India to regulate money supply, short-term interest rates, and overall liquidity in the financial system. It ensures smooth functioning of money markets and effective transmission of monetary policy.
2. What are 14-day variable rate repo and reverse repo operations?
These are liquidity instruments where banks can park surplus funds with the RBI for 14 days at variable interest rates. They were introduced to manage liquidity over a longer horizon, but banks have shown reluctance to use them extensively.
3. What is WACR and why is it important?
WACR (Weighted Average Call Rate) is the average rate at which banks lend funds to each other overnight in the call money market. It serves as the operative target for monetary policy and helps RBI align short-term rates with policy repo rates.
4. How does RBI engage with stakeholders before implementing changes?
The RBI releases reports like the Internal Working Group’s recommendations and invites public comments from banks, financial institutions, and other stakeholders to ensure transparency and inclusivity before finalizing decisions.
5. How do these changes impact the Indian economy?
Refinements in liquidity management improve monetary policy transmission, stabilize interest rates, enhance financial stability, and create a predictable environment for lending and investment.
6. When will stakeholders provide feedback on the proposed changes?
The RBI has invited public comments until August 29, 2025, after which final decisions on revisions to the Liquidity Management Framework will be made.
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