RBI set to tweak liquidity management toolkit, discontinue 14-day VRRR? Key takeaways from recommendations

The Reserve Bank of India announced a number of liquidity-related changes on Wednesday as it revealed the MPC’s decision to maintain the status quo on policy rates as well as policy stance. Among major tweaks to its liquidity management framework was its decision to do away with the 14-day variable rate reverse repo (VRRR), with the RBI planning to focus on the variable rate repo (VRR) and the seven-day VRRR as its primary tools to conduct liquidity-related operations in the system. The move comes amid improving liquidity conditions in the country. 

The development confirms a Zee Business report in late July suggesting that the RBI could announce such decisions. 

The changes are part of recommendations by an internal central bank working group that studied the existing liquidity management framework that has been in place since February 2020. The suggestions were uploaded on the RBI portal after the policy announcements.

Here is a summary of some of the key changes mentioned in the RBI’s new liquidity management framework, as suggested by the working group: 

• The RBI will continue to utilise the overnight weighted average call money rate as the operative target of monetary policy.
• All repo operations will now take place at variable rates. 
• The central bank will also be able to launch same-day operations, if required. 
• The central bank’s liquidity operations will now be linked with the net demand and time liabilities (NDTL).
• The changes are set to make liquidity-adjustment operations more flexible and market-friendly. 
• The RBI will also be able to opt for fixed rate operations upon detecting sudden stress in the liquidity conditions. 

With internal working group’s recommendations in place, what happens next? 

The RBI has invited feedback on the recommendations from all stakeholders till August 29. It will decide on the new framework accordingly. 

Status quo on repo rate and policy stance

The recommendations followed the RBI’s move to leave the repo rate as well as the policy stance unchanged. Currently, the repo rate -- or the key interest rate at which the RBI lends money to commercial banks -- stands at 5.5 per cent and stance at ‘neutral’. 

What RBI said on liquidity and financial stability in August policy

Here’s a summary of key points from the RBI’s latest monetary policy statement: 

• Banking system liquidity remains ample: An average daily surplus of around Rs 3 lakh crore is set to be further supported by a cash reserve ratio (CRR) cut kicking in from September 
• Policy rate cuts since February have been effectively transmitted: Fresh loan rates have decreased by 71 basis points across lending, deposit, money and bond markets (out of which, 55 bps is due to interest rate cuts) 
• The RBI is set to maintain a flexible approach to liquidity management to support smooth credit flow and ensure policy transmission remains effective 
• The banking sector remains financially sound, with stable capital levels, asset quality and profitability
• The credit-deposit ratio is steady at 78.9 per cent, versus a similar level last year
• While bank credit growth moderated to 12.1 per cent in FY25, overall funding to industry rose; this has been driven by increased borrowing via corporate bonds and commercial paper, and higher internal resource use by large companies