Summary of this article
RBI infused another Rs. 50,000 crore worth of liquidity in banking system
Bond purchases by RBI limiting rise in yields but pressure remain
The Reserve Bank of India infused Rs. 50,000 crore of liquidity in the banking system in what was the fourth such injection since the central bank last cut the repo rate in December. While bond yields are expected to remain supported for some time due to the bond purchases, market participants do not expect a sharp rise in bond prices as broader pressures persist.
The RBI purchased Rs. 3,499 crore of a 2029 bond with a coupon of 7.10 per cent; Rs. 4,063 crore of a 2032 bond with 7.95 per cent coupon; Rs. 7,949 crore of a 2034 bond with 7.73 per cent coupon; Rs. 12,500 crore worth of 2036 bond with 7.41 per cent coupon; and Rs. 3,092 crore of 2054 bond with a coupon of 7.09 per cent. The RBI, however, rejected all bids for the 2040 bond with the coupon of 8.30 per cent in the open market operation (OMO) auction.
The RBI has scheduled two more tranches of bond purchases through OMO auctions, totalling another Rs. 1 lakh crore during the month. The RBI had, in 2025, bought nearly Rs. 7 lakh crore of bonds just through OMO auctions.
These bond buys are part of the RBI’s bid to infuse durable liquidity in the banking system to ensure effective transmission of rate cuts effected during the past year. The RBI’s Monetary Policy Committee has cut the repo rate by 125 basis points since last February.
While the rate easing cycle aims to lower the borrowing rate and provide easier money, stress in liquidity in the banking system due to the RBI’s firm intervention in the foreign exchange market has made it difficult for banks to pass on the rate cut fully.
As per the latest RBI release, the estimated liquidity in the banking system is around Rs. 64,812.30 crore in surplus. This liquidity is much less than 1 per cent of banks’ net demand and time liabilities, despite the continuous infusion by the RBI.
While the RBI’s bond purchases slightly open up space for bond investors and slightly reduce the supply pressure, institutional market participants, especially banks, remain conservative in the bond buys in the secondary market. This is a deposit growth for banks that have taken a hit, and as liquidity in the system remains under pressure due to the depreciating rupee. Bond yields are expected to remain under pressure as RBI’s rate easing cycle is seen over and as investors grapple with the bumper state bond supply in the final quarter of the current financial year.
