Summary of this article
RBI will buy Rs. 1 lakh crore of bonds in December
OMO purchases will inject liquidity and help offset rupee outflows
The Reserve Bank of India (RBI) will buy Rs. 1 lakh crore worth of bonds through open market operations (OMOs) and a three-year dollar-rupee buy-sell swap for $ 5 billion. RBI said in a statement on December 5, 2025 that these steps will infuse durable liquidity into the banking system.
The RBI will buy bonds through auctions in two tranches in December, each of Rs. 50,000 crore. This will be the first time since May this year that RBI has taken to the market to buy bonds through an auction. The RBI had, between January and May this year, bought around Rs. 5 lakh crore of government bonds from the market.
While detailing the monetary policy statement last week, RBI Governor Sanjay Malhotra said the liquidity measures were intended to ensure effective monetary policy transmission and to support stability in the market.
“We are hopeful that these measures will ensure adequate, durable liquidity in the system and further facilitate monetary transmission,” Malhotra said.
What are OMOs
OMOs are a key monetary policy tool through which the central bank buys or sells government bonds to regulate liquidity in the banking system.
OMOs can be done by RBI either to inject or to drain out liquidity from the system. In case of an OMO purchase, the RBI injects liquidity into the system. An OMO sale is the opposite of an OMO purchase.
The RBI may also choose to conduct OMO buys or sales in the secondary market without holding an auction. These secondary market purchases or sales are reported by RBI in its weekly statistical bulletin.
With the RBI announcing the bond buys in December, it seems pertinent that liquidity in the banking system needs to be improved. According to the latest RBI data, liquidity in the banking system stood at around Rs 2.15 lakh crore.
Malhotra said that current liquidity in the banking system exceeds 1 per cent of the banks’ net demand and time liabilities (NDTL), at times ranging between 0.6 per cent and 1 per cent, and occasionally going higher.
“The exact number, whether 0.50, 0.60, or 1 per cent, should not matter. What is important is that banks have enough reserves to function smoothly,” he said.
Why Is RBI Conducting An OMO Buy Now
Malhotra mentioned that the primary reason for the OMO auctions and the other liquidity infusing measures were to effectively transmit rate cuts done by the RBI. However, another underlying factor that experts have pointed out is the sharp depreciation in rupee against the dollar.
The RBI has during the current year cut the repo rate by 125 basis points (bps), including the 25 bps cut last week. Malhotra said a transmission of 79 bps on fresh rupee loans have already taken place. But part of why the remainder of the transmission is yet to take place is due to squeeze in rupee liquidity in the banking system despite additional liquidity measures, such as cuts in cash reserve ratio (CRR) or other fine-tuning operations by the RBI.
This was due to the outflows from the system, as the RBI intervened in the foreign exchange market to support the rupee by selling dollars in the market.
“RBI’s foreign exchange (FX) intervention has broadly undone the impact of CRR cut of 1 per cent of NDTL spread over September to November that had injected approximately Rs. 2.50 trillion into the system. RBI’s forward book increased to $63.6 billion as of October. Now, as these positions mature, it could (if RBI sells these dollars) act as a further drain on rupee liquidity,” HDFC Bank said in a note.
Now, with the rupee hovering near record lows above 90 against a dollar, intervention in the secondary market is expected to continue, market participants have said.
Though Malhotra reiterated that the central bank is not targeting any particular level in rupee, the fact is that the rupee has underperformed most of its Asian peers. Also, a larger volatility in rupee compared to its peers makes a case for RBI to continue its intervention in the foreign exchange market.
The OMO auctions along with the other liquidity infusing measures taken by RBI will help offset the impact of rupee outflows due to RBI’s intervention in the currency market. Additionally, the OMO buys will also help ease pressures in money-market conditions, and limit volatility in short-term yields.
For investors, an OMO buy by RBI poses opportunities for appreciation in bond prices.
“Yields across the curve are expected to fall due to RBI’s OMO auctions. The safest bet is to stay invested in liquid (government) bonds or ones maturing between 5-10 years,” a bond dealer who did not wish to be named, said.
