In the face of rising demand from Indian banks for fixed-rate liquidity support, the Reserve Bank of India (RBI) is unlikely to reintroduce the policy of daily fixed-rate lending, according to three people familiar with internal discussions. The central bank is reportedly inclined to continue with its current system of variable rate liquidity operations, where banks bid based on their needs.

The policy, known as fixed-rate liquidity operations, had allowed banks to borrow at a predetermined rate, helping them navigate day-to-day funding requirements, especially during liquidity crunches caused by tax outflows or market volatility. However, RBI sources suggest the central bank is disinclined to return to that system.

Central bank prefers market-based discipline

“The RBI is clearly not in favour of hand-holding banks and wants to keep any liquidity operation on a variable rate,” one of the sources told Reuters on condition of anonymity. The sources declined to be named as they are not authorised to speak publicly on internal policy discussions.

In variable rate repo or reverse repo operations, the central bank injects or absorbs funds through a bidding mechanism, making the system more market-driven. These tools are a core part of the RBI’s liquidity adjustment facility (LAF).

Bankers had proposed a return to fixed-rate daily operations during recent meetings with RBI officials, arguing that such a measure would help them better plan liquidity and improve stability, particularly during periods of excessive volatility.

Banks faced acute liquidity stress recently

Last week, interbank overnight call money rates spiked above the marginal standing facility (MSF) rate, which marks the upper bound of the policy rate corridor. This spike was attributed to tax-related fund outflows that led banks to park excess liquidity with the RBI under reverse repos, only to later face a shortage.

“On days like that, it helps if there is a repo window available,” said a second banking source.

Additionally, some lenders sought a relaxation in the rules mandating daily maintenance of the cash reserve ratio (CRR) — the proportion of deposits banks must hold with the RBI — to gain greater flexibility in managing short-term fund mismatches.

Policy shift likely: Seven-day repo may replace 14-day

The RBI is also in the process of revising its liquidity management framework, and insiders indicate that the updated guidelines could be announced along with the monetary policy decision on August 6, 2025.

Market participants expect that the main liquidity instrument could shift from the current 14-day variable rate repo, which has not been conducted for the past six fortnights, to a seven-day repo window.

This shorter-term tool is seen as more responsive to banks’ changing liquidity needs, especially in a dynamic market environment impacted by seasonal outflows, government borrowings, and external shocks.

The context behind RBI’s reluctance

The RBI's preference for variable rate tools stems from its commitment to monetary transmission efficiency, interest rate signalling, and maintaining a disciplined financial ecosystem.

Experts note that fixed-rate liquidity operations, while providing comfort to banks, may dilute market discipline and distort interbank market dynamics.

"Fixed-rate repo operations can send the wrong signal if banks begin to rely on central bank support instead of managing their own liquidity buffers," said a senior treasury official at a private bank.

Moreover, the central bank has been cautious in calibrating liquidity tools that align with its inflation-targeting mandate while avoiding a surge in systemic risk.

No official comment from RBI yet

The RBI did not respond to a Reuters email seeking clarification on whether it is reviewing its stance on fixed-rate operations or considering bank proposals around CRR flexibility.

This comes at a time when the central bank is already navigating persistent inflation pressures, volatile global capital flows, and an evolving external trade environment.

Implications for markets

If the revised framework is introduced on August 6 as expected, it could:

• Reposition the seven-day repo as the main tool for liquidity adjustment.

• Signal continued preference for market-linked pricing, reinforcing transparency.

• Require banks to improve liquidity forecasting capabilities rather than rely on daily RBI windows.

• Lead to greater interbank borrowing activity to manage short-term mismatches.

Bankers may need to adapt by deepening their participation in call money and certificate of deposit (CD) markets, especially during periods of frictional liquidity.

Conclusion

Despite calls for more predictable and supportive liquidity tools, the RBI appears firm on sticking to variable rate operations. This strategy, while more volatile in the short term, is believed to strengthen financial discipline and align with global best practices.

With the central bank preparing to unveil a revised liquidity framework, banks and markets alike will be watching closely on August 6, when the monetary policy statement is released. The fine balance between flexibility and discipline remains central to India's evolving monetary toolkit.

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