RBI should expand LAF corridor to steady markets, SBI analysis suggests

The SBI economic research team has outlined a case for structural reforms to India's key monetary policy tool, arguing that broadening the LAF corridor would provide greater cushion against market volatility at a time when external pressures are intensifying.

The proposal for asymmetric widening—adjusting the corridor's upper and lower bands at different rates—reflects concerns about maintaining liquidity equilibrium while preserving the RBI's ability to respond to emerging stresses. Such a recalibration could allow the central bank more flexibility in managing money market conditions without necessarily moving policy rates.

Beyond the corridor adjustment, the SBI report advocates for swifter monetary policy action to preempt inflation and growth risks before they take root. The bank also suggests shortening the deadline for exporters to repatriate foreign exchange proceeds, a measure aimed at smoothing capital flows and reducing currency market pressures.

The recommendations come as Indian financial markets face headwinds from global economic uncertainty, currency volatility, and divergent monetary policies among major central banks. Market participants have increasingly sought stronger policy coordination to manage these cross-border spillovers.