The singer, who died in 2011 after a long illness, is best remembered for hit songs such as Baker Street and Stuck In The Middle With You.
His daughter Martha said earlier this month that she was considering selling items, including the handwritten lyrics to Baker Street, at auction but council leaders in his home town of Paisley have offered to create a permanent exhibition in the town's museum and art gallery.
Fans of Rafferty took to Facebook to plead with his daughter not to sell the memorabilia.
Ms Rafferty said she would look in to the idea of a display and Renfrewshire Council leader Mark Macmillan has now written to her offering to create a permanent exhibition celebrating the life of her father.
He said: "Gerry Rafferty is one of Paisley's most famous sons and it is only right that we celebrate the man and his talent with a permanent exhibition.
"I saw the many posts on Facebook about Martha Rafferty planning to auction off some of her father's memorabilia and the reaction from her family and fans.
"Martha did follow up on Facebook by saying she would look in to the idea of a display in the museum, in Paisley.
"So, we would like to offer Martha the chance to put her father's memorabilia - including the handwritten lyrics of Baker Street - on permanent display in Paisley Museum.
"I have no doubt Gerry Rafferty fans would love to see this memorabilia on display and we would be delighted to work together with Martha to create a permanent and fitting exhibition in memory of her father."
Rafferty maintained strong links with Paisley throughout his career. He first met Billy Connolly in the town and joined his band, The Humblebums, starting his hugely successful recording career.
He later went on to form Stealers Wheel with fellow Paisley musician Joe Egan, with whom he co-wrote Stuck In The Middle With You.
The second Stealers Wheel album, Ferguslie Park, was named after the housing scheme in Paisley.
In an interview, Rafferty explained: ''It reminded us of our roots and we were clinging ferociously to our roots. Our identity and our songs were formed in this town.''
His funeral in Paisley brought hundreds of people from Scottish cultural and political life together and a street has been named after him in the north end of the town.