Analysts See RBI Tools as Key to Keeping Overnight Rates Aligned with Policy Corridor

The Reserve Bank of India (RBI) is effectively managing overnight interbank lending rates to stay within its policy corridor through targeted liquidity operations, according to market analysts. On July 4, 2025, the RBI withdrew ₹1 trillion ($11.7 billion) from the banking system via a seven-day variable rate reverse repo auction, a move aimed at balancing a liquidity surplus exceeding ₹4 trillion, the highest in three years. This follows a 50-basis-point rate cut in June 2025, bringing the policy repo rate to 5.50% and the standing deposit facility (SDF) rate to 5.25%, setting the corridor’s boundaries.

Analysts note that the RBI’s strategy prevents overnight rates, such as the weighted average call rate (WACR) and tri-party repo rate (WATR), from falling too far below the repo rate, ensuring effective policy transmission. On the day of the auction, WACR rose to 5.30% and WATR to 5.23%, reflecting tighter liquidity management. The RBI’s shift to neutral policy stance and reduced cash reserve ratio (CRR) to 3% in tranches since June 2025 further supports lending while controlling excess liquidity. Posts on X highlight that 75.7% of large banks’ loans are now floating-rate, aiding faster rate transmission.

The RBI’s actions come amid concerns over U.S. tariffs potentially impacting India’s 6.7% GDP growth forecast for 2025-26. By fine-tuning liquidity, the central bank aims to support economic growth while maintaining price stability. Southasiandesk.com will continue to track these developments as the RBI navigates global and domestic economic challenges.

Published in SouthAsianDesk, July 4th, 2025

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