The Reserve Bank of India (RBI) released the Internal Working Group (IWG) report in 2025 reviewing its Liquidity Management Framework. Liquidity management is at the heart of effective monetary policy, ensuring smooth control over short-term interest rates, market stability, and monetary transmission.
This review highlights challenges and suggests reforms to make India’s financial markets more resilient and efficient.
Discontinuation of 14-Day Variable Rate Repo
- The IWG recommends phasing out the 14-day variable rate repo/reverse repo as the main liquidity operation.
- Banks are reluctant to lock surplus funds for 14 days due to uncertainty in government cash balances and currency flows.
- Instead, the group suggests weekly operations with flexible fine-tuning tools for smoother liquidity adjustment.
Weighted Average Call Rate (WACR) as Operating Target
- The report supports retaining WACR as the operating target.
- However, declining activity in the overnight call money market weakens RBI’s ability to control short-term rates.
- Narrow interest rate corridors have reduced inter-bank transactions, as banks prefer to deal directly with RBI.
- A balance between corridor width and market vibrancy is needed.
Reserve Requirements and Averaging Mechanism
- Minimum reserve requirements and averaging mechanisms stabilize call money rates by absorbing liquidity shocks.
- Banks can manage costs by adjusting borrowings within the reserve maintenance period.
- However, most banks maintain higher daily balances than required, reducing system efficiency.
- IWG suggests lowering daily minimum reserves to boost arbitrage opportunities and reduce volatility.
Standalone Primary Dealers (SPDs) and Volatility
- SPDs are major borrowers in the call money market but lack access to Marginal Standing Facility (MSF).
- This leads to sharp rate fluctuations during liquidity crunches.
- IWG recommends phasing out SPDs’ participation in the call market instead of giving them MSF access.
- Alternative borrowing/lending avenues should be developed for SPDs.
Structural Surplus Liquidity Challenges
- Persistent surplus liquidity often causes the WACR to drift away from the policy rate and corridor bounds.
- This creates uncertainty in interest rate transmission.
- RBI needs to ensure WACR stays close to the policy rate to support stable financial markets.
Need for Balanced Corridor Width
- The current 50 basis points corridor width is narrow compared to peers.
- While it reduces volatility, it also suppresses inter-bank activity.
- The IWG calls for empirical studies to reassess corridor width and trade-offs.
- A slightly wider corridor may improve market functioning and RBI’s control over short-term rates.