Liquidity Recalibrated: RBI Unveils Revised Framework To Sharpen Monetary Transmission

The Reserve Bank of India has announced a comprehensive overhaul of its liquidity management framework, aimed at improving monetary policy transmission and enhancing short-term rate stability. The revised structure, disclosed on September 30, 2025, includes key operational changes while retaining critical benchmarks such as the Cash Reserve Ratio and the Overnight Weighted Average Call Rate.

 

Key Highlights From The Revised Framework

 

- Banks will continue to maintain a minimum of 90 percent of the prescribed Cash Reserve Ratio on a daily basis, ensuring consistent reserve discipline  

- The Overnight Weighted Average Call Rate will remain the operating target of monetary policy, reinforcing its role as the anchor for short-term interest rates  

- The RBI will actively endeavour to align the Weighted Average Call Rate with the policy repo rate, narrowing volatility and improving rate predictability  

- The 14-day Variable Rate Repo and Reverse Repo operations will be discontinued as the main tools for managing transient liquidity  

- Liquidity absorption and injection will now rely more on fine-tuned instruments such as overnight and short-tenor operations, tailored to evolving market conditions

 

Strategic Implications For Financial Markets

 

- The shift away from 14-day VRR/VRRR operations reflects RBI’s intent to simplify the liquidity toolkit and respond more nimbly to systemic shifts  

- Market participants are expected to recalibrate their treasury strategies, with greater reliance on overnight funding and real-time rate signals  

- The framework aims to reduce distortions in the money market and foster smoother transmission of policy rate changes to lending and deposit rates

 

Looking Ahead

 

- RBI will monitor liquidity conditions closely and adjust operational modalities as needed to maintain financial stability  

- Banks and primary dealers are advised to align their reserve management and collateral strategies with the new framework

 

Sources: Reserve Bank of India Statement, Economic Times Banking Desk, Reuters India Finance Tracker, Business Standard Monetary Policy Briefing, Mint Regulatory Updates