Kent signed a contract at the Reds in August 2017 to keep him on Merseyside until 2022 but faces a huge task to break into Jurgen Klopp’s star-studded side.
Steven Gerrard is desperate to keep him at Ibrox for another season with another loan the most likely option if he is to return to Glasgow.
But the Light Blues could face a fight to land the 22-year-old after English Premier League side Fulham were linked with a permanent move for the winger.
It could leave Kent with a huge decision to make in the summer, but Walters says the former England Under-20 international shouldn’t underestimate the trust of Rangers boss Gerrard.
Kent is currently in his fifth loan spell away from Liverpool but has played some of his best football this season after being given a run of first-team games.
He has spoken of his happiness in Scotland, where Walters enjoyed the most successful spell of his career at Rangers where he won three league titles and two League Cups before following Graeme Souness to Liverpool in 1991.
And the 54-year-old said: “Ryan has a couple of years left on his contract at Liverpool but for his development he should stay at Rangers beyond this season.
“Ryan knows that Steven Gerrard likes him and trusts him. He knows what he is about from going to back to their Liverpool days.
“I don’t care how good you are – if you are not playing regularly then you can’t fulfil your promise. It is better for Ryan to be with a manager who has that trust in him.
“Being picked is the best possible way to know that a manager has confidence in you. A manager can be in your ear telling you that he thinks you are a good player. But you are still not playing.
“If he thinks he has come as far as he can at Liverpool then I’m sure they would let him move and play elsewhere. He is not the type to be disruptive but he has to think of his own career. And if Liverpool want to sell him, then of course the financial aspect comes into it. Can Rangers compete with some of the other clubs who might be interested?
“That’s a question only Rangers can answer. But if it’s the case that he wants a massive club and the biggest stage then he won’t get that anywhere else other than at Ibrox.
“Ryan can go all the way in the game, without a doubt. He has shown some great potential. Looking from the outside, he appears to be a good professional.”
Kent was the star of the show in the last Old Firm game as he inspired Rangers to a first derby win in 13 attempts with a dazzling display against Celtic.
That performance was the high point of his time north of the border and Walters said: “Some people had said he hadn’t played as well as he could have before that – and he had some injury problems as well.
“But in that match against Celtic he really showed what he is capable of. So did a lot of the team that day.”
Kent will have the chance to show he can produce his best against the Hoops again when the sides clash at Parkhead on Sunday.
Walters admitted he wishes his old club were closer to their bitter rivals going into the game as they trail by 10 points having been level going into the winter break after that 1-0 win at Ibrox.
He spoke after rolling back the years to score a sublime goal for a Liverpool & Premier League Select in their 4-3 defeat to a Rangers Legends side at Blackpool’s Bloomfield Road ground on Saturday.
Around 10,000 Gers fans made the trip, with cash raised split between Kilbride Hospice, The Emmie Smillie Charity Foundation and Hillsborough & Ibrox Disaster Memorial Fund.
Ahead of the derby at Parkhead, Walters said: “Looking back, the winter break maybe didn’t do Rangers a lot of favours. I’m disappointed this game is not going to be more decisive in terms of the title.
“But the team has still come on bundles from last year. They have played good football and the expectation is back to what it should be for Glasgow Rangers.”