RBI Liquidity Management 2025-26: WACR, LAF & Transmission
The RBI Annual Report FY 2025-26 shows that monetary policy during the year was not simply a story of repo-rate cuts. The effectiveness of monetary easing depended equally on how the Reserve Bank managed system liquidity and how quickly policy changes transmitted into money-market rates, deposit rates and lending rates. The RBI retained the Weighted Average Call Rate (WACR) as the operating target, maintained a symmetric 50-bps policy corridor around the repo rate, used OMOs, term repos, forex swaps and CRR reduction to influence durable liquidity, and relied on variable-rate operations for shorter-term liquidity management. By year-end, the cumulative easing since February 2025 had translated into substantial reductions in both lending and deposit rates.
For the RBI Grade B Promotion Exam, this is a high-value topic because questions can test both conceptual understanding and specific operational numbers.
1. What Is Liquidity Management?
In simple terms, liquidity management means managing the amount of funds available to banks in the financial system so that short-term interest rates remain aligned with the monetary-policy stance.
The RBI does not simply announce:
“Repo rate = X%”
and leave the market alone.
It must ensure that actual overnight market rates remain broadly consistent with the desired monetary-policy stance.
That is where the operating framework becomes important.
The Annual Report explains that during 2025-26 liquidity was influenced by:
- changes in Government of India cash balances;
- growth in currency in circulation;
- volatile capital flows;
- RBI foreign-exchange operations.
These factors could either withdraw liquidity from the banking system or inject liquidity into it. The RBI used multiple instruments to offset these movements.
2. The Core Operating Target: WACR
The Weighted Average Call Rate (WACR) remained the operating target of monetary policy.
This is one of the most important facts to remember.
Memorise:
WACR = Operating target of monetary policy
The RBI’s liquidity-management framework was reviewed during 2025-26 in the context of structural changes in the financial system, including:
- 24×365 payment systems;
- “Just-in-Time” fund releases for centrally sponsored schemes.
Following the review, the RBI retained:
WACR as the operating target
and retained a:
symmetric policy corridor of 50 bps around the policy repo rate.
3. Understanding the Policy Corridor
The policy corridor determines the broad operating range within which overnight money-market rates are expected to move.
The three key rates are:
Repo Rate
The central policy rate.
SDF Rate
The Standing Deposit Facility acts as the floor of the corridor under normal conditions.
MSF Rate
The Marginal Standing Facility acts as the ceiling.
Therefore, conceptually:
MSF
↑
Repo Rate
↓
SDF
with the corridor being symmetric around the repo rate.
The Annual Report specifically states that the policy corridor was retained at 50 bps around the repo rate.
Exam Point
If the question asks:
“What is RBI’s operating target of monetary policy?”
Answer:
WACR
If it asks about the corridor:
Symmetric 50 bps corridor around the policy repo rate.
4. Why Does the WACR Matter?
The repo rate is an administered policy rate, but actual transactions in the overnight market take place at market-determined rates.
The WACR therefore provides a critical indicator of whether the RBI’s monetary-policy stance is actually being transmitted to the money market.
The Annual Report states that the WACR remained broadly within the LAF corridor during 2025-26 and moderated alongside the cumulative 125-bps reduction in the policy repo rate since February 2025.
During FY 2025-26:
Average WACR spread over repo = –7 bps
compared with:
+6 bps in 2024-25.
This indicates that overnight market rates generally remained close to, but on average slightly below, the repo rate.
5. How Did Liquidity Conditions Move During 2025-26?
Liquidity conditions were not uniform throughout the year.
They moved between:
- comfortable surplus;
- temporary tightness;
- surplus;
- deficit;
- renewed surplus.
This is why the RBI needed both liquidity absorption and liquidity injection operations.
Q1: April–June 2025
Liquidity conditions remained comfortable because of durable liquidity measures.
Average daily net absorption under the LAF was:
₹2.03 lakh crore
Because liquidity was abundant, the RBI discontinued its daily variable-rate repo auctions effective June 11, 2025.
Overnight rates remained close to the SDF rate.
The RBI subsequently resumed VRRR operations on June 27, 2025 to absorb surplus liquidity.
Interpretation
There was too much liquidity.
Therefore:
Excess liquidity → absorption operations
rather than additional liquidity injection.
6. Q2: July–September 2025
Surplus liquidity continued, but there was a brief period of liquidity deficit from:
September 22–24, 2025
This was attributed to:
- build-up of Government cash balances;
- RBI forex operations.
During Q2, the RBI conducted:
- 22 VRRR auctions to absorb surplus liquidity;
- 14 VRR auctions to address intermittent liquidity tightness.
This illustrates an important point:
Liquidity management is dynamic.
The RBI can simultaneously need absorption operations over one period and injection operations during another.
7. Q3: October–December 2025
Liquidity surplus moderated during Q3.
Average net absorption under the LAF declined to:
₹1.21 lakh crore
System liquidity generally remained in surplus during October-November, helped by higher government spending.
However, liquidity turned into deficit during the second half of December because of:
- advance tax payments;
- capital outflows.
The RBI responded by conducting 26 VRR operations to address temporary liquidity tightness.
Exam Concept
Advance tax payments can temporarily drain liquidity from banks because funds move from the banking system into government accounts.
Therefore:
Tax outflow → banking-system liquidity contraction → RBI liquidity injection may be required.
8. Q4: January–March 2026
Liquidity conditions turned into surplus and expanded during Q4.
The RBI cited:
- increased government spending;
- durable liquidity operations.
It conducted:
18 VRR operations
to address intermittent tightness.
More importantly, the RBI conducted OMO purchases of Government securities amounting to:
₹1 lakh crore
in two tranches:
- ₹50,000 crore — March 9, 2026
- ₹50,000 crore — March 13, 2026
9. Average System Liquidity: The Big Number
Across FY 2025-26, system liquidity improved.
Average daily surplus liquidity:
₹1.86 lakh crore
This is an important number for objective examinations.
Amid surplus liquidity:
Banks’ recourse to MSF declined.
At the same time, banks maintained substantial balances under the SDF.
Absorption through SDF accounted for:
84.9%
of average total LAF absorption.
In absolute terms:
SDF absorption = ₹2.02 lakh crore
out of:
Average total LAF absorption = ₹2.38 lakh crore.
10. Why Were Banks Holding Large SDF Balances?
The Annual Report notes that elevated SDF balances reflected, among other factors, banks’ higher demand for precautionary liquidity.
This is conceptually important.
A bank may prefer to park surplus funds with the RBI rather than deploy them immediately in the market, especially when maintaining liquidity buffers is valuable.
Thus:
Surplus funds → SDF → liquidity absorption
11. What Were the Major Drivers of Liquidity?
The RBI identifies three particularly important drivers during 2025-26:
1. Currency in Circulation
An increase in currency demand withdraws liquidity from the banking system.
2. Government Cash Balances
When government balances accumulate, liquidity can be withdrawn from the banking system.
When government spending increases, liquidity can return to the system.
3. Capital Flows / Forex Operations
Foreign-exchange transactions conducted by the RBI can affect domestic rupee liquidity.
The Annual Report states that the liquidity withdrawal caused by currency demand and RBI forex operations was more than offset by primary liquidity injections through durable liquidity measures.
12. RBI’s Liquidity Toolkit in FY 2025-26
The RBI used a broad set of instruments.
| Instrument | Broad purpose |
|---|---|
| Repo / VRR | Inject liquidity |
| Reverse repo / VRRR | Absorb liquidity |
| SDF | Absorb surplus liquidity |
| MSF | Provide overnight liquidity against eligible collateral |
| OMO purchases | Inject durable liquidity |
| CRR reduction | Release funds to banking system |
| Term repo | Inject liquidity for longer tenor |
| Forex swaps | Provide durable rupee liquidity |
| Fine-tuning operations | Address transient liquidity mismatches |
The Annual Report describes two-way fine-tuning operations as the key instrument for managing frictional liquidity during the year.
13. Important Change: 14-Day VRR and VRRR Discontinued as Main Operations
The review of the liquidity-management framework produced an important structural change.
The RBI:
- retained WACR as the operating target;
- retained the symmetric 50-bps corridor;
- discontinued 14-day variable-rate repo and reverse-repo auctions as the main liquidity-management operations.
Instead, transient liquidity was sought to be managed primarily through variable-rate repo and reverse-repo auctions of 7-day and other tenors, ranging from overnight to 14 days.
Exam Trap
Do not write:
“VRR and VRRR were abolished.”
That would be incorrect.
The Annual Report says the 14-day VRR and VRRR auctions were discontinued as the main operations. Variable-rate operations of other tenors continued to be used for liquidity management.
14. Durable Liquidity vs Transient Liquidity
This distinction is extremely important.
Transient Liquidity
Short-lived liquidity mismatches.
The RBI uses:
- VRR;
- VRRR;
- other short-term variable-rate operations.
Durable Liquidity
More persistent changes in system liquidity.
The RBI used:
- OMO purchases;
- CRR reduction;
- long-term forex swaps;
- term operations.
The Annual Report explicitly records a “slew of durable liquidity augmenting measures” during 2025-26.
15. RBI’s Durable Liquidity Injection Measures
The Annual Report gives a detailed table.
Major operations during FY 2025-26
| Period | Measure | Amount |
|---|---|---|
| April 2025 | OMO purchases | ₹1,20,000 crore |
| April 2025 | Term VRR | ₹25,731 crore |
| May 2025 | OMO purchases | ₹1,19,203 crore |
| Sep-Nov 2025 | CRR cuts | ₹2,50,000 crore* |
| December 2025 | OMO purchases | ₹1,50,000 crore |
| December 2025 | Forex swap | ₹46,147 crore* |
| January 2026 | OMO purchases | ₹2,00,000 crore |
| January 2026 | Forex swap | ₹90,304 crore* |
| January 2026 | Term VRR | ₹1,36,504 crore |
| February 2026 | OMO purchase | ₹50,000 crore |
| February 2026 | Forex swap | ₹90,434 crore* |
| March 2026 | OMO purchases | ₹1,00,000 crore |
| Total | ₹13,78,323 crore |
*Approximate values as reported in the Annual Report.
The number to remember:
Total durable liquidity injection measures = ₹13.78 lakh crore approximately.
16. OMO Purchases: Why Are They Important?
Open Market Operations (OMOs) involve the RBI buying or selling Government securities.
For liquidity injection:
RBI buys G-secs → pays sellers → banking-system liquidity increases.
For liquidity absorption:
RBI sells G-secs → receives funds → liquidity decreases.
During FY 2025-26, OMO purchases were a major source of durable liquidity.
According to the liquidity table, total net OMO purchases were:
₹8,77,567 crore
during the year.
This should not be confused with the ₹13,78,323 crore figure, which covers the broader set of durable liquidity injection measures listed in the Annual Report.
17. Monetary-Policy Transmission: What Does It Mean?
Monetary-policy transmission is the process through which a change in the RBI’s policy rate affects financial-market conditions and ultimately economic activity.
The simplified chain is:
Repo rate
↓
Money-market rates
↓
Bank funding/deposit rates
↓
Lending rates
↓
Borrowing and investment/consumption
↓
Aggregate demand
↓
Growth and inflation
The Annual Report shows that this transmission was reasonably strong during 2025-26.
18. How Much Did Lending Rates Fall?
This is one of the most important numerical areas of Part 11.
The repo rate declined by:
100 bps during FY 2025-26
In response, banks reduced:
- MCLR;
- external benchmark-based lending rates.
Consequently:
WALR on fresh rupee loans
declined by:
95 bps
WALR on outstanding rupee loans
declined by:
78 bps
during FY 2025-26.
Exam Point
Repo -100 bps → Fresh WALR -95 bps → Outstanding WALR -78 bps
This is a very likely numerical MCQ.
19. What Happened to Deposit Rates?
Monetary-policy transmission was also visible on the deposit side.
The Weighted Average Domestic Term Deposit Rate (WADTDR) declined by:
Fresh deposits:
65 bps
Outstanding deposits:
49 bps
during 2025-26.
Therefore:
| Indicator | Change in FY26 |
|---|---|
| Repo rate | -100 bps |
| Fresh deposit rate | -65 bps |
| Outstanding deposit rate | -49 bps |
| Fresh lending rate | -95 bps |
| Outstanding lending rate | -78 bps |
20. Why Was Lending-Rate Transmission Faster?
The Annual Report highlights the role of external benchmark-based lending rates (EBLRs).
The external benchmark regime strengthened the pace of monetary-policy transmission.
Banks also increasingly extended EBLR-linked loans to non-mandated sectors.
This means that when the benchmark moves, the interest rate on linked loans can adjust more quickly than under older internal benchmark mechanisms.
21. EBLR vs MCLR: The Important Data
The share of EBLR-linked loans in outstanding floating-rate rupee loans increased over time.
| Benchmark | March 2024 | March 2025 | December 2025 |
|---|---|---|---|
| MCLR | 39.2% | 34.9% | 32.0% |
| EBLR | 56.6% | 61.7% | 65.4% |
| Others | 4.2% | 3.4% | 2.6% |
| Total | 100% | 100% | 100% |
What does this show?
The share of floating-rate loans linked to EBLR has been increasing while the MCLR share has declined.
That makes monetary-policy transmission more responsive.
22. Public Sector Banks vs Private Banks
Transmission was not identical across bank groups.
As of December 2025:
EBLR-linked share of outstanding floating-rate loans
Public Sector Banks: 50.6%
Private Banks: 89.2%
The Annual Report notes that the higher predominance of EBLR-linked loans in private banks contributed to faster transmission to WALR on outstanding rupee loans for private banks compared with public sector banks.
Exam Point
PVB EBLR share > PSB EBLR share
and therefore:
Transmission was faster for private banks than public sector banks during the easing cycle.
23. Foreign Banks Recorded the Highest Decline
Across bank groups, the decline in WALR on both fresh and outstanding loans was highest for:
Foreign Banks
The Annual Report attributes this partly to their higher share of external benchmark-linked loans.
The decline was also higher for private banks compared with public sector banks during the easing cycle.
24. Interest Rates at the End of FY 2025-26
The Annual Report provides a useful snapshot of major rates.
| Indicator | March 2025 | March 2026 |
|---|---|---|
| WACR | 6.32% | 5.29% |
| Tri-party Repo | 6.17% | 5.09% |
| Market Repo | 6.32% | 5.13% |
| 3-month T-Bill | 6.46% | 5.33% |
| 3-month CP | 7.80% | 7.60% |
| 3-month CD | 7.54% | 7.35% |
| AAA 5-year corporate bond | 7.43% | 7.53% |
| 5-year G-sec | 6.56% | 6.46% |
| 10-year G-sec | 6.66% | 6.76% |
The table demonstrates an important point:
Not every interest rate necessarily falls by the same amount as the repo rate.
Market-specific factors, credit risk, liquidity, government borrowing and supply-demand conditions also matter.
25. Why Didn’t All Market Rates Fall Uniformly?
The Annual Report notes that:
- short-term rates generally moderated with policy easing;
- G-sec yields hardened from Q2;
- market spreads generally increased;
- corporate and money-market rates were affected by market-specific factors.
For example, the CP-T-Bill spread increased substantially by March 2026.
Therefore, monetary transmission should never be interpreted mechanically as:
Repo falls 100 bps → every interest rate falls exactly 100 bps.
Instead:
Repo-rate change provides the policy impulse; market structure and risk conditions determine the eventual transmission.
26. Monetary Policy Transmission: Easing Cycle Comparison
The Annual Report provides a particularly useful historical comparison.
February 2025–March 2026 easing cycle
| Indicator | Change |
|---|---|
| Repo rate | -125 bps |
| Fresh deposit rate | -55 bps |
| Outstanding deposit rate | -47 bps |
| 1-year median MCLR | -60 bps |
| EBLR | -125 bps |
| Fresh WALR | -93 bps |
| Outstanding WALR | -88 bps |
Notice the difference between:
FY 2025-26
and
February 2025–March 2026
The former records the financial year’s 100-bps repo reduction, while the latter captures the broader easing cycle’s 125-bps reduction.
Again, this distinction is an exam favourite.
27. What Was the Overall Outcome?
The Annual Report concludes that:
- system liquidity improved;
- WACR remained broadly aligned with the policy corridor;
- monetary easing was transmitted to money-market rates;
- lending rates declined significantly;
- deposit rates also declined;
- EBLR strengthened transmission;
- durable liquidity measures supported financial conditions.
The result was a policy environment designed to support credit expansion and economic activity while maintaining orderly market conditions.
28. Cause → Development → Effect → Significance
This is the best way to write a descriptive answer.
Cause
Inflation moderated sharply and monetary policy entered an easing cycle.
Development
Repo rate declined; CRR was reduced; OMOs, forex swaps and term operations injected durable liquidity.
Effect
System liquidity remained largely surplus and money-market rates moderated.
Transmission
Banks reduced MCLR and EBLR-linked lending rates, while deposit rates also declined.
Significance
Credit conditions became more supportive of economic activity and monetary-policy transmission strengthened.
29. Part 11: Most Important Numbers
Memorise these first.
Liquidity
- Average daily system liquidity surplus: ₹1.86 lakh crore
- Average total LAF absorption: ₹2.38 lakh crore
- SDF absorption: ₹2.02 lakh crore
- SDF share of total LAF absorption: 84.9%
- Total durable liquidity injection measures listed: ₹13.78 lakh crore
- Net OMO purchases: ₹8.78 lakh crore
- March 2026 OMO purchases: ₹1 lakh crore
Transmission
- FY26 repo reduction: 100 bps
- Fresh WALR decline: 95 bps
- Outstanding WALR decline: 78 bps
- Fresh WADTDR decline: 65 bps
- Outstanding WADTDR decline: 49 bps
- December 2025 EBLR share: 65.4%
- December 2025 MCLR share: 32.0%
30. Exam Revision: Instruments at a Glance
| Instrument | Think of it as |
|---|---|
| Repo / VRR | Liquidity injection |
| VRRR | Liquidity absorption |
| SDF | Parking/absorbing surplus liquidity |
| MSF | Emergency/overnight liquidity facility |
| OMO Purchase | Durable liquidity injection |
| OMO Sale | Liquidity absorption |
| CRR Cut | Releases bank funds into system |
| Forex Swap | Can provide durable rupee liquidity |
| Term Repo | Longer-tenor liquidity injection |
| WACR | Operating target |
Key Takeaways
- WACR remained the operating target of monetary policy.
- RBI retained a symmetric 50-bps policy corridor around the repo rate.
- System liquidity averaged a ₹1.86 lakh crore daily surplus.
- SDF accounted for 84.9% of average total LAF absorption.
- SDF absorption averaged about ₹2.02 lakh crore.
- Liquidity was driven mainly by currency demand, government cash balances and capital/forex flows.
- RBI used VRR and VRRR for transient liquidity management.
- The 14-day VRR/VRRR auctions were discontinued as the main operations, not eliminated altogether.
- RBI used OMOs, CRR reduction, term repos and forex swaps for durable liquidity augmentation.
- Total durable liquidity injection measures listed in the Annual Report amounted to ₹13.78 lakh crore.
- Net OMO purchases amounted to ₹8.78 lakh crore.
- March 2026 alone saw ₹1 lakh crore of OMO purchases.
- FY26 repo reduction was 100 bps, but the broader February 2025-March 2026 easing cycle totalled 125 bps.
- Fresh WALR declined 95 bps and outstanding WALR declined 78 bps.
- Fresh and outstanding deposit rates declined 65 bps and 49 bps, respectively.
- EBLR-linked loans reached 65.4% of outstanding floating-rate loans by December 2025.
- Private banks had a much higher EBLR-linked share (89.2%) than PSBs (50.6%).
Last-Minute Revision Sheet
Liquidity
₹1.86 lakh crore = average daily surplus
84.9% = SDF share of total LAF absorption
₹2.02 lakh crore = SDF absorption
₹2.38 lakh crore = average total LAF absorption
₹13.78 lakh crore = durable liquidity injection measures
₹8.78 lakh crore = net OMO purchases
Transmission
-100 bps = FY26 repo
-95 bps = fresh WALR
-78 bps = outstanding WALR
-65 bps = fresh deposit rate
-49 bps = outstanding deposit rate
Benchmarks
WACR = operating target
50 bps = symmetric corridor
65.4% = EBLR share
32.0% = MCLR share
89.2% = private-bank EBLR share
50.6% = public-sector-bank EBLR share
Most Probable Exam Questions
Objective
1. What is RBI’s operating target for monetary policy?
WACR
2. What was the average daily system liquidity surplus in FY26?
₹1.86 lakh crore
3. What percentage of average total LAF absorption was through SDF?
84.9%
4. What was the FY26 decline in fresh WALR?
95 bps
5. What was the FY26 decline in outstanding WALR?
78 bps
6. What was the EBLR share in outstanding floating-rate loans in December 2025?
65.4%
7. What was the MCLR share?
32.0%
8. Which bank group had the highest EBLR-linked share?
Private sector banks — 89.2%
9. What was the symmetric policy corridor?
50 bps around the repo rate
10. What was the total durable liquidity injection listed by RBI?
₹13,78,323 crore
Descriptive
“Explain how RBI ensured effective monetary-policy transmission during FY 2025-26.”
A strong answer should contain:
Repo-rate easing + CRR reduction + durable liquidity injection + OMOs + forex swaps + term repos + WACR operating target + EBLR transmission + reduction in WALR and deposit rates.
One-Line Mega Revision
FY26 liquidity management = WACR as operating target + ±50-bps corridor + ₹1.86 lakh crore average daily surplus + SDF-led absorption + VRR/VRRR for transient liquidity + ₹13.78 lakh crore durable liquidity measures + ₹8.78 lakh crore net OMO purchases + strong transmission to lending/deposit rates through EBLR.
Next Part
Part 12 — RBI Annual Report FY 2025-26: Credit Delivery, Financial Inclusion & Financial Literacy
The next article moves from liquidity and monetary transmission to the RBI’s broader objective of ensuring that credit actually reaches agriculture, MSMEs, priority sectors, underserved regions and financially excluded households, along with the National Strategy for Financial Inclusion (NSFI) 2025-30 and major financial-literacy initiatives.