Summary of this article
RBI’s liquidity measures show uneven market transmission.
Bond yields remain high despite record OMO liquidity infusion.
SBI urges RBI to refocus OMOs on liquid benchmark bonds.
In 2025, the Reserve Bank of India (RBI) took several steps to ensure that economic growth is supported in the country. One such move was to cut the repo rate by a large amount of 125 points and inject huge liquidity in the system through the Open Market Operations (OMOs). The liquidity injected into the market is around Rs 5.5 lakh crore, which is the highest ever in India’s monetary history. In the SBI Research Ecowrap, it highlights these movements, their shortcomings and what can be predicted.
The report highlights asymmetric transmission as the main issue. Asymmetric transmission refers to the moves made by the RBI which don’t have a planned or uniform effect in the monetary landscape of the country.
Firstly, the positive outcome of this uneven execution is that bank lending rates have come down. Around 65 per cent of the loans are now linked to external benchmarks, such as repo rates. As a result, the weighted average lending rate (WALR) on fresh loans has fallen by 62 points during 2025. This has helped revive the credit growth, which had significantly slowed in 2024.
The behaviour in corporate borrowing has also shown changes. Previously, companies preferred raising money from bond markets because bank loans were expensive. Now, since the bank lending rates have decreased, borrowing from banks is attractive again. This was noticed more for highly rated companies. As a result of this, bank credit has started growing again, including large firms and MSMEs.
Problems Persist In Money And Bond Markets
While bank loans have responded well to these changes, the money market and bond market have had a different reaction. Short-term rates like commercial paper and certificates of deposit fell significantly. However, from around August 2025, these rates stabilised and started rising again, even as the RBI continued to ease policy.
On the other hand, yields on long-term bonds stopped falling after June and started rising soon after. This puzzled people because such a large liquidity injection should have pushed the yields down. Conversely, the markets are demanding higher risk premiums.
This limbo shows that liquidity is not enough alone. Markets respond to RBI signals as well.
State Borrowing Costs
This problem is also evident in the case of state governments. State Development Loans (SDLs), which are bonds issued by states, have continued to carry high borrowing costs. The average yield on state borrowing landed around 7.16 per cent during April-December 2025. This number is barely lower than the previous year.
This is concerning because the RBI also acts as a debt manager for the central and state governments. The RBI has this added responsibility to ensure smooth yield management. The RBI, in the past, has termed the yield curve as a “public good,” meaning it should ideally remain stable.
What The Report Says About The OMO Strategy
The report argues that the lies in how the RBI executes the OMOs. Currently, the RBI often buys bonds that are not traded. This results in the low influence of market price and investor sentiment.
The suggestion is simple: the RBI should conduct OMOs on high liquidity or benchmark bonds. These are closely watched by the market and serve as a reference for other pricings of securities.
If the RBI buys the liquid bonds, it sends a clear signal that it wants a lower yield. Right now, the opposite of this is happening, which signals that the transmission is weak and not travelling well in the markets.
It is suggested that if RBI refines the OMO strategy, it can reduce the market confusion and improve the transmission evenly across all segments and sectors. RBI, being the monetary powerhouse in India, holds the power to stimulate market funds on a stronger footing.
