By Mr. Abhay Ray 
Mumbai, July 30, 2025 — The Reserve Bank of India (RBI) is expected to unveil a revamped liquidity management framework in its upcoming monetary policy next week, with the goal of enhancing short-term rate predictability and stabilizing funding costs for banks. According to sources familiar with the development, the central bank has been in extensive consultations with market participants over the past three months to refine its liquidity tools.
The discussions—held with senior bank officials, economists, and primary dealers, including meetings as recent as Monday—indicate that the new framework may include a shift toward using the 7-day Variable Rate Repo (VRR) as the primary operational instrument, a reintroduction of the fixed-rate repo window, and a move to formally introduce a new benchmark rate called the Secured Overnight Reference Rate (SORR).
Background: Need for Liquidity Clarity
The RBI’s renewed focus on short-term liquidity tools comes amid persistent demand from banks and financial institutions for greater transparency and stability in funding operations. Volatility in the call money market and the declining relevance of the Mumbai Interbank Offered Rate (MIBOR)—especially in the wake of the global phase-out of LIBOR—have exposed gaps in the current framework.
“A lot of uncertainty remains around how overnight rates are expected to behave. The governor did say they would announce the revised liquidity framework by the end of this month, and the market is keenly awaiting it,” a treasury official involved in the discussions said.
7-Day VRR May Become the New Normal
One of the core changes anticipated is the RBI’s pivot from 14-day VRR operations to the 7-day tenor. The 14-day VRR had become the standard liquidity tool during the tenure of former Governor Urjit Patel, designed to build a short-term yield curve and ensure more structured liquidity absorption.
However, under the new approach, the RBI may operationalize the 7-day VRR as the central tool, citing its balance of flexibility and structure. Bankers believe that the shorter tenor enables easier recalibration of liquidity on a weekly basis and minimizes interim mismatches.
“There’s a growing sense that the RBI wants to anchor liquidity operations around the 7-day window. It’s short enough to offer agility and long enough to provide a framework,” another treasury official noted. The central bank has also been testing shorter duration repos—such as one-day and three-day operations—in recent months, receiving encouraging feedback from the market.
Banks Push for Fixed-Rate Repo Facility
In addition to the shift in tenor, banks have lobbied for the reintroduction of a fixed-rate repo facility, allowing them assured access to liquidity at the policy repo rate—up to 1% of their Net Demand and Time Liabilities (NDTL). This facility had been in place earlier but was discontinued during liquidity framework revisions in past years.
Currently, banks depend on variable rate repos or the more expensive Marginal Standing Facility (MSF) for short-term funds. Both options are either market-linked or penal in nature, causing fluctuations in overnight borrowing costs.
“If banks can access assured liquidity at the repo rate at any time, it will reduce end-of-day rate volatility and funding pressure,” said a senior economist from a leading public sector bank. The reintroduction of this window would thus offer a stabilizing backstop in the money market.
Introduction of SORR: A New Market Benchmark
Perhaps the most transformative shift expected is the formal introduction of the Secured Overnight Reference Rate (SORR)—a new benchmark based on actual transactions in the Triparty Repo (TREPS) market. This would gradually replace MIBOR, which has been the go-to rate for pricing loans and derivatives but is now seen as outdated due to its limited representativeness.
“With LIBOR being phased out globally, and MIBOR losing its grip as a reliable benchmark, it makes sense to adopt a rate based on the TREPS market, where most of the short-term action now takes place,” one of the officials involved in the meetings explained.
The SORR would align the Indian financial system more closely with international practices, where regulators are increasingly emphasizing transaction-based benchmarks rather than poll-based or indicative rates.
A Broader Strategic Shift
The expected changes in the liquidity framework reflect a broader strategic shift under RBI Governor Sanjay Malhotra, who appears to be prioritizing short-term rate stability over building a yield curve via long-term VRRs—a hallmark of the Urjit Patel-era approach.
Market conditions have improved marginally in recent weeks, with more consistent liquidity and lower volatility. Yet, the absence of clarity around the RBI’s preferred operating target has left room for speculation and inefficiencies. The upcoming policy may finally provide definitive direction.
Industry Expectations
Market participants are cautiously optimistic. A more structured liquidity framework would help financial institutions plan funding with more accuracy, reduce unexpected borrowing costs, and create more alignment between policy rates and market rates.
“The key is predictability,” said a Mumbai-based dealer. “If the RBI can stabilize overnight rates and ensure banks have smoother access to liquidity, it will reduce a lot of stress in the system.”
Conclusion
As India’s financial system matures, the RBI’s evolving liquidity management strategy reflects the need for precision, stability, and alignment with global standards. The anticipated adoption of the 7-day VRR, revival of a fixed-rate repo facility, and rollout of SORR as a benchmark are seen as decisive steps in that direction. If implemented effectively, the new framework could usher in a more responsive and resilient monetary system, better equipped to manage short-term funding dynamics in an increasingly complex market environment.
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