Recent Trends in the Indian Money Market

Why a corridor works. No bank will lend in the market below the rate at which it can deposit with the central bank, and none will borrow above the rate at which it can borrow from the central bank. The overnight market rate is therefore penned between the two, and the Bank steers it by moving the middle.

The operating target. The weighted average call rate. The Economic Survey 2025-26 states this expressly and records that during FY26 it generally remained below the policy repo rate, averaging 8 basis points below it up to 8 January 2026, which is what a large liquidity surplus produces.

Why the standing deposit facility matters. Before it, the Bank absorbed surplus liquidity by reverse repo, which required it to hand over securities as collateral, so its capacity to absorb was limited by the securities it held. The standing deposit facility absorbs without collateral, so the floor of the corridor is no longer constrained by the Bank's balance sheet.

Trend three: the policy actions of FY26, which are the current example

• The Monetary Policy Committee cumulatively reduced the repo rate by 100 basis points between April and December 2025, and as of December 2025 the repo rate stands at 5.25 per cent.
• The stance was changed from accommodative to neutral in June 2025 and has been maintained since, which the Survey explains as preserving flexibility.
• The cash reserve ratio was reduced by 100 basis points to 3.0 per cent of net demand and time liabilities, in stages between September and November 2025, expected to release about 2.5 lakh crore rupees of primary liquidity by December 2025. Over the longer window the Survey records the ratio as cumulatively reduced by 125 basis points between December 2024 and November 2025.
• Durable liquidity was injected through nine open market operation purchases totalling 2.39 lakh crore rupees in April and May 2025, a further 1 lakh crore rupees of purchases in December, and a three year US dollar and rupee buy sell swap of 5 billion dollars in December.

The cash reserve ratio is statutory. Section 42(1) of the RBI Act requires every scheduled bank to maintain with the Bank an average daily balance at a percentage of its net demand and time liabilities that the Bank may notify. A cut in it releases money the bank was obliged to keep idle.

Trend four: a persistent liquidity surplus

The Survey measures system liquidity by the net position under the liquidity adjustment facility.

• Average surplus of about 1.89 lakh crore rupees during FY26 up to 8 January 2026, against 1,605 crore rupees in FY25. The scale of that change is the point.
• Borrowing under the marginal standing facility fell to an average of 2,244 crore rupees in FY26 from 6,902 crore in FY25, because banks needed the ceiling facility less.
• Deployment under the standing deposit facility rose to an average of 1.74 lakh crore rupees in FY26 from 0.94 lakh crore in FY25, because banks had surpluses to place.

Read those three together. A market with a surplus places money at the floor rather than borrowing at the ceiling, and its market rate sits below the middle. That is exactly the pattern the numbers show, and it is why the call rate averaged 8 basis points below the repo rate.

Trend five: collateralisation and the shift within the overnight market

Overnight lending has moved from uncollateralised call money to collateralised repo, and within repo to tri party repo, in which a third party manages collateral selection, valuation and margining. The consequences are that the lender's risk is secured, that a wider set of participants can lend safely, and that volumes are far larger than the call money market ever carried. This is the single most important structural change in the market and it belongs at the head of any answer on recent trends.

Trend six: deregulation and external benchmarks

Administered interest rates have gone. Deposit and lending rates are set by banks, and lending rates for specified categories of loan are linked to an external benchmark, such as the policy repo rate or a treasury bill yield, rather than to a rate the bank computes itself. The effect is that a change in the policy rate now reaches the borrower automatically at the next reset instead of when the bank chooses.

The trends in one table

A worked example: following a rate cut through the market

The decision. The Committee cuts the repo rate by 25 basis points.

1. The corridor moves with it. The marginal standing facility, at 25 basis points above, and the standing deposit facility, at the floor, move down by the same amount, so the whole corridor shifts.
2. The overnight market follows. No bank will lend below the standing deposit facility rate or borrow above the marginal standing facility rate, so the weighted average call rate falls into the new corridor. In a surplus, it settles near the floor, which is why it averaged 8 basis points below the repo rate in FY26.
3. Other short term rates follow the overnight rate. Treasury bill yields, certificate of deposit rates and commercial paper rates all reprice, because their issuers and buyers can always choose the overnight market instead.
4. Bank lending rates follow, at the next reset, for loans linked to an external benchmark. This is where the older transmission problem was, and where the benchmark reform bites.
5. Deposit rates follow more slowly, because banks compete for deposits and are reluctant to cut them.
6. The unorganised sector does not follow at all, which is the dichotomy of [The Features and the Defects of the Indian Money Market].

Where the Bank intervenes if the chain does not work. If the surplus is too small for the market rate to settle where it wants, the Bank buys securities in open market operations or cuts the cash reserve ratio, both of which add durable liquidity. That is exactly what it did in FY26: 3.39 lakh crore rupees of open market purchases across the year, a dollar rupee swap, and a hundred basis point cut in the reserve ratio.

What beginners get wrong

"The repo rate is the rate at which banks lend to each other." It is the rate at which the Reserve Bank lends to banks against securities. Banks lending to each other overnight without collateral is the call money market.

"The reverse repo rate is the floor of the corridor." It was. The floor is now the standing deposit facility, which absorbs liquidity without the Bank giving collateral.

"The Monetary Policy Committee sets the inflation target." The Central Government, in consultation with the Bank, sets the target under section 45ZA, once in five years. The Committee sets the policy rate to achieve it, under section 45ZB.

"A cash reserve ratio cut is the same as a repo rate cut." A repo cut changes the price of money. A reserve ratio cut changes the quantity, by releasing balances the bank was obliged to hold idle. The FY26 sequence used both.

"A liquidity surplus means the economy has too much money." It means banks are holding more than they need with the central bank. Whether that becomes money in the economy depends on whether they lend it.

Limits and criticism

Transmission is still incomplete. External benchmark linking has improved it for new and floating rate loans, but deposit rates and older loans move more slowly, and the unorganised sector not at all.

The framework has been tested by supply shocks. Inflation driven by food or by crude oil is not something a policy rate can address quickly, and raising the rate to meet it slows an economy that is already being squeezed.

A large surplus has costs. It compresses the return on the banking system's liquid assets and can push the market rate persistently below the policy rate, which weakens the signalling value of the policy rate itself.

The figures date quickly. Every number in this chapter is a position on a stated date, and a reader in a later year must check the current one.

Quick revision

1. Statutory framework: RBI Act amended May 2016. Section 45ZA, the Central Government in consultation with the Bank sets the inflation target on the Consumer Price Index once in five years. Section 45ZB, a six member Monetary Policy Committee sets the policy repo rate. Target 4 per cent, band 2 to 6, notified 5 August 2016, retained 31 March 2021 and again on 25 March 2026 for 2026 to 2031. Failure is average inflation outside the band for three consecutive quarters.
2. The corridor: marginal standing facility at the ceiling, 25 basis points above the repo rate; policy repo rate in the middle; standing deposit facility at the floor, absorbing without collateral.
3. Operating target: the weighted average call rate. It averaged 8 basis points below the repo rate in FY26 to 8 January 2026.
4. FY26 actions: repo cut 100 basis points April to December 2025 to 5.25 per cent; stance accommodative to neutral in June 2025; cash reserve ratio cut 100 basis points to 3.0 per cent of net demand and time liabilities, releasing about 2.5 lakh crore rupees, with 125 basis points cut cumulatively from December 2024 to November 2025.
5. Durable liquidity: nine open market purchases of 2.39 lakh crore rupees in April and May 2025, 1 lakh crore more in December, and a three year 5 billion dollar buy sell swap.
6. Liquidity position: net liquidity adjustment facility surplus averaging 1.89 lakh crore rupees in FY26 against 1,605 crore in FY25; marginal standing facility borrowing down from 6,902 to 2,244 crore; standing deposit facility deployment up from 0.94 to 1.74 lakh crore.
7. Structural: overnight lending moved from uncollateralised call money to repo and tri party repo; lending rates linked to external benchmarks.
8. Section 42(1) of the RBI Act is the statutory basis of the cash reserve ratio.

Test yourself

1. Describe the monetary policy framework within which the Indian money market now operates. Since the amendment of the Reserve Bank of India Act in May 2016 the framework has been one of flexible inflation targeting with a statutory basis. Under section 45ZA the Central Government, in consultation with the Bank, determines the inflation target in terms of the Consumer Price Index once every five years and notifies it in the Official Gazette; the target has been four per cent with an upper tolerance of six and a lower of two since 5 August 2016, was retained on review on 31 March 2021 and was retained again on 25 March 2026 for the period from 1 April 2026 to 31 March 2031. Under section 45ZB a six member Monetary Policy Committee constituted by the Central Government determines the policy repo rate required to achieve that target. Failure is defined as average inflation outside the tolerance band for any three consecutive quarters, on which the Bank must report to the Government the reasons, the remedial action and the time it expects to need.

2. What is the policy corridor, and how does it control the overnight rate? The corridor is bounded above by the marginal standing facility, the penal rate at which a bank may borrow overnight from the Reserve Bank by dipping into its statutory liquidity ratio holdings, set at twenty five basis points above the repo rate; below by the standing deposit facility, the rate at which a bank may place surplus funds with the Bank without receiving collateral; and in the middle by the policy repo rate, at which the Bank lends against securities. It controls the overnight rate because no bank will lend in the market at less than it can earn by depositing with the central bank, and none will borrow at more than it can pay to borrow from the central bank, so the market rate is confined between the floor and the ceiling. The Bank steers the rate by moving the middle of the corridor, and the operating target it aims at is the weighted average call rate.

3. Why was the standing deposit facility an important change? Because it removed a constraint on the central bank's ability to absorb liquidity. Previously the Bank absorbed surplus funds through reverse repo, under which it had to deliver securities to the lending bank as collateral, so the amount it could absorb was limited by the stock of securities on its own balance sheet. The standing deposit facility allows a bank to place funds with the Reserve Bank without receiving collateral in return, so the floor of the corridor no longer depends on the Bank's holdings. Its practical importance is visible in the FY26 figures, when deployment under the facility averaged 1.74 lakh crore rupees against 0.94 lakh crore in FY25.

4. Describe the monetary policy actions of FY26 and their effect on liquidity. The Monetary Policy Committee reduced the repo rate cumulatively by one hundred basis points between April and December 2025, bringing it to 5.25 per cent as of December 2025, and changed its stance from accommodative to neutral in June 2025. The Reserve Bank reduced the cash reserve ratio by one hundred basis points to 3.0 per cent of net demand and time liabilities in stages between September and November 2025, which was expected to release about 2.5 lakh crore rupees of primary liquidity by December 2025, the ratio having been cut by 125 basis points cumulatively between December 2024 and November 2025. It injected durable liquidity through nine open market purchases totalling 2.39 lakh crore rupees in April and May 2025, a further one lakh crore rupees of purchases in December and a three year dollar rupee buy sell swap of five billion dollars. The result was a system liquidity surplus averaging 1.89 lakh crore rupees under the net liquidity adjustment facility during FY26 to 8 January 2026, against only 1,605 crore rupees in FY25, with borrowing under the marginal standing facility falling from an average of 6,902 crore to 2,244 crore and deployment under the standing deposit facility rising from 0.94 lakh crore to 1.74 lakh crore.

5. Distinguish a cut in the repo rate from a cut in the cash reserve ratio. A cut in the repo rate changes the price of central bank money: it lowers the cost at which banks may borrow from the Reserve Bank against securities and, through the corridor, lowers the whole structure of short term rates. A cut in the cash reserve ratio changes the quantity: section 42(1) of the Act obliges every scheduled bank to maintain with the Bank an average daily balance at a notified percentage of its net demand and time liabilities, and reducing that percentage releases balances the bank was obliged to keep idle, adding durable liquidity to the system. The two are complements rather than substitutes, and FY26 used both, a hundred basis point reduction in each, the first to lower the price of funds and the second to ensure that banks had the funds to lend at that price.

6. Why does the weighted average call rate matter, and what does it mean that it ran below the repo rate? It matters because it is the operating target of monetary policy: the Reserve Bank's immediate objective in the money market is to keep that rate close to the policy repo rate, and every other short term rate is built on it. During FY26, up to 8 January 2026, it generally remained below the policy repo rate, averaging eight basis points below. That is what a large and persistent liquidity surplus produces: with more funds in the system than banks need, lenders compete and the market rate drifts towards the floor of the corridor rather than the middle. It indicates easy conditions and effective transmission of the easing, but a rate that sits persistently away from the policy rate also weakens the signalling value of the policy rate itself, which is one of the costs of running a large surplus.