RBI’s Recommendations on Liquidity Management Framework (LMF)

Context: The Reserve Bank of India published the Report of the Internal Working Group to Review the Liquidity Management Framework—an analysis of how India’s central bank conducts and fine-tunes liquidity operations.

RBI’s Liquidity Management Framework (LMF)

The Liquidity Management Framework (LMF) is the RBI’s toolkit for regulating cash/liquidity in the banking system. It helps steer short-term interest rates and ensures the smooth transmission of monetary policy.

Core Mechanism

• Relies on the Liquidity Adjustment Facility (LAF) – using repo (inject liquidity) and reverse repo (absorb liquidity).
• Operates within a corridor system where the policy repo rate is the midpoint.
• The Weighted Average Call Rate (WACR) is the key operating target.

Other Tools in LMF

• Open Market Operations (OMO)
• Cash Reserve Ratio (CRR)
• Statutory Liquidity Ratio (SLR)
• Used for longer-term and structural liquidity adjustments.

RBI’s Recent Recommendations on LMF (IWG Report, 2025)

WACR as Operating Target

• Continue using overnight WACR as the operating target.
• Reason: Strong correlation with other overnight market rates → ensures effective transmission of policy signals.

Discontinue 14-Day VRR/VRRR as Primary Tool

• Replace with 7-day repo/reverse repo operations and other tools (overnight to 14 days).
• Reason: Banks show lower participation in 14-day auctions; shorter-tenor operations are more effective and less disruptive.

Advance Notice for Liquidity Operations

• RBI should provide at least one day’s notice before repo/reverse repo auctions.
• Exception: Same-day operations may be conducted if liquidity conditions change suddenly.
• Reason: Helps reduce uncertainty and stabilises money market rates.

Maintain Minimum CRR Requirement

• Continue with 90% daily minimum CRR maintenance.
• Reason: Ensures banks maintain adequate reserves and prevents liquidity shortfalls.

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