The RBI’s new Liquidity Management Framework (LMF), finalized in September 2025, marks a significant shift in how liquidity is managed in the Indian banking system. The core objective is to simplify operations, reduce uncertainty, and ensure that market rates remain closely aligned with the policy repo rate. The framework retains the overnight Weighted Average Call Rate (WACR) as the operating target for monetary policy, with the repo rate at the center of a symmetric corridor flanked by the Standing Deposit Facility (SDF) and Marginal Standing Facility (MSF) at ±25 basis points. This means that the SDF acts as the floor (lower bound) and the MSF as the ceiling (upper bound) for short-term interest rates.

A key operational change is the discontinuation of the 14-day Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) as the main tools for managing short-term liquidity. Instead, liquidity will be managed primarily through 7-day VRR/VRRR operations, with other short-tenor operations (from overnight to 14 days) used as needed. The RBI will provide at least one day’s advance notice for liquidity operations, except in urgent situations, to enhance transparency and reduce market uncertainty.

The requirement for banks to maintain at least 90% of their prescribed Cash Reserve Ratio (CRR) on a daily basis remains unchanged. Standalone Primary Dealers (SPDs) now have access to SDF and repo operations of all tenors, which broadens their participation in liquidity management.

The table below summarizes the key changes in the new LMF compared to the previous framework:

In April 2025, the RBI’s Monetary Policy Committee (MPC) unanimously decided to lower the policy repo rate by 25 basis points to 6.00%, changing the stance to 'accommodative'. This dovish shift is a clear signal that the RBI is prioritizing growth and supporting economic activity. The SDF rate now stands at 5.75% and the MSF rate at 6.25%, maintaining the symmetric corridor around the repo rate.

The accommodative stance implies that future MPC outcomes are likely to be either a status-quo or a further cut, providing policy rate guidance without direct guidance on liquidity management. The RBI Governor emphasized that the MPC will 'proactively' take liquidity measures to keep liquidity adequate, with a surplus of around 1% of Net Demand and Time Liabilities (NDTL) considered reasonable.

The reduction in the repo rate is expected to lower borrowing costs for banks and corporates, stimulate investment, and support consumer spending. However, it also brings risks, such as potential inflationary pressures and reduced returns on fixed-income investments. The table below shows the impact of the repo rate cut on key interest rates and market segments:

The new liquidity framework and repo rate adjustments have significant implications for both equity and debt markets. For equities, lower interest rates generally support higher valuations as the cost of capital decreases and corporate earnings improve. Sectors such as banking, real estate, and consumer durables are likely to benefit from lower borrowing costs and increased consumer spending. However, the risk of inflation and potential rate hikes in the future could cap gains.

For debt markets, the reduction in interest rates leads to lower yields on fixed-income instruments, which can affect the returns of debt mutual funds and fixed deposits. Investors may need to adjust their portfolios to maintain desired risk-return profiles. The table below compares the performance of key equity and debt indices before and after the repo rate cut:

Given the new liquidity framework and repo rate adjustments, investors and financial professionals need to adapt their strategies to navigate the changing market environment. For equity investors, a focus on interest-rate-sensitive sectors such as banking, real estate, and consumer durables is recommended. For debt investors, a shift towards shorter-duration debt instruments can help mitigate the risk of further rate cuts.

The table below provides actionable strategies for different types of investors:

While the new liquidity framework and repo rate adjustments present opportunities, they also bring risks that investors and financial professionals need to consider. The primary risks include potential inflationary pressures, global economic uncertainties, and the possibility of future rate hikes. The RBI’s proactive approach to liquidity management and its commitment to maintaining market stability are positive factors, but vigilance is required.

The table below summarizes the key risks and considerations for investors: