Summary of this article
RBI will infuse liquidity in the banking system through OMOs and buy-sell swaps
The 10-year bond yield fell over 15 bps Wednesday following the announcement
The Reserve Bank of India (RBI), in a surprise move, announced that it will infuse nearly Rs 2.9 lakh crore of durable liquidity in the banking system across December and January. This sent a rally across bond yields as investors cheered the RBI’s move to infuse system liquidity while reducing the government debt burden for investors.
The RBI said that it will buy government bonds to the tune of Rs 2 lakh crore in four equal tranches through open market operation (OMO) auctions, the first of which will be held on December 29. RBI will also conduct a $10 billion dollar-rupee buy-sell swap in January.
While market participants were hoping for the RBI to announce more bond purchases through OMO auctions in the fourth quarter of the financial year, the early announcement before Christmas triggered a sharp fall in yields across tenures on Wednesday. The 10-year benchmark government bond (G-sec) yield fell to 6.54 per cent from near eight-month highs, cheering on the RBI’s announcement of additional bond purchases.
The RBI has bought nearly Rs 6 lakh crore of bonds through OMO auctions this year, with Rs 1 lakh crore of bond buys in December alone. Additionally, the RBI has also reduced the benchmark repo rate by 125 basis points, bringing it to 5.25 per cent in 2025.
Despite these moves, bond yields had shown a divergence, with the 10-year benchmark G-sec yield rising to 6.70 per cent on Tuesday as investor appetite waned and the rate-easing cycle was seen over.
Liquidity and investor interest
Another reason for the uptick in yields was that system liquidity fell below 1 per cent of banks’ net demand and time liabilities (NDTL), primarily due to the RBI’s firm intervention in the foreign exchange market to arrest the sharp fall in the rupee.
“They (RBI) had withdrawn Rs 3.4 trillion in FY26 via FX intervention. So as a result, though, RBI did so much infusion of open market operations (OMO), etc., but your system liquidity is below one per cent of NDTL since, I think, September. That has had a negative impact on near-term yield. It's also further impacted bank appetite because if, let's say, banking system liquidity is not consistently in significant surplus, deposit growth does not pick up,” Gaura Sengupta, chief economist at IDFC First Bank, said.
But, with the recent announcement of the RBI’s infusion, that is expected to change. The liquidity infusion by RBI is expected to bring the system liquidity above one per cent of NDTL before the end of the financial year, market participants said. Further, some also expect the RBI to announce more bond purchases in February if liquidity conditions continue to remain tight due to the rupee outflows through the RBI’s foreign exchange market interventions.
What's more for bonds?
Investors are also hopeful that the likely inclusion of Indian government bonds in Bloomberg's Global Aggregate Index in January will pull bond yields down further. The announcement, which could come in January, is expected to bring around $25-30 billion of fresh inflows into G-secs.
However, investors will also watch the gross bond supply numbers closely. Most experts expect state borrowings to rise in the fourth quarter, and when combined with higher government redemption pressures, this could prompt investors to limit the fall in bond yields, potentially capping any sharp decline in bond yields and restricting the downward move in bond yields.
