The Reserve Bank of India’s revised liquidity framework is unlikely to be released soon, according to sources familiar with the matter. Instead, the central bank is expected to introduce *variable rate reverse repo auctions* to bring the call rate closer to the repo rate. Additionally, the RBI plans to use the *cash reserve ratio (CRR) more frequently* to manage durable liquidity in the banking system.
Liquidity Framework Revision and Market Implications
- The RBI had initially planned to revise its liquidity management framework to streamline operations and improve monetary transmission
- Sources indicate that the framework update has been postponed, with no clear timeline for its release
- The delay suggests that the central bank may continue relying on existing liquidity tools while assessing market conditions
Reverse Repo Auctions to Anchor Call Rate
The RBI is expected to *announce variable rate reverse repo auctions* to ensure that the weighted average call rate remains aligned with the policy repo rate. This move is aimed at improving liquidity absorption and stabilizing short-term interest rates.
- Reverse repo auctions will allow banks to park excess funds with the RBI at a variable rate, influencing overall liquidity conditions
- The mechanism is designed to prevent excessive volatility in the interbank lending market
Increased Use of Cash Reserve Ratio for Liquidity Management
The central bank plans to *use the CRR more frequently* to manage durable liquidity in the financial system. The CRR, which mandates banks to hold a portion of their deposits as reserves, will be adjusted based on liquidity needs.
- The RBI recently cut the CRR by 50 basis points, freeing up *1.16 trillion rupees* in the banking system
- Frequent CRR adjustments will provide the central bank with greater flexibility in controlling liquidity without relying solely on open market operations
Future Outlook
With the liquidity framework revision delayed, the RBI is expected to focus on *short-term liquidity tools* to maintain financial stability. Market participants will closely monitor upcoming policy announcements, particularly regarding reverse repo auctions and CRR adjustments.
Sources: Reserve Bank of India, The Print, Banking School.
