Author: Adtya Pareek | EQMint | General News

In a major milestone for India’s debt markets, the Reserve Bank of India (RBI) on Thursday completed the first of its two scheduled open-market bond purchases (OMOs) for December, taking its total bond acquisitions in FY26 to a record ₹3.16 trillion. The latest operation involved ₹50,000 crore of government securities, purchased at higher-than-expected cutoff prices, which led to a softening of yields across the secondary market.

The scale of bond purchases this fiscal year marks the RBI’s most aggressive liquidity support operation to date, as the central bank pushes to reinforce monetary easing and ensure smooth policy transmission in the banking system.

RBI’s Bond Buys Push Down Yields; Market Eyes 10-Year 2035 Bond for Next Operation

The central bank’s December OMO saw strong market participation, with most of the purchases concentrated in six- and seven-year maturities, indicating the RBI’s intent to address supply pressure in the belly of the yield curve.

Following the auction, the benchmark 10-year bond yield dropped nearly six basis points, settling around 6.60%, after briefly flirting with a breakdown below the 6.65–6.66% levels earlier in the session. Traders now widely expect that the 10-year 6.33% 2035 bond could feature in the next operation, as the RBI prepares another round of ₹50,000 crore purchases scheduled for next Thursday.

Bond dealers suggest that including the 2035 benchmark could provide additional support to long-duration yields, which have remained under pressure due to shifting investment flows and macroeconomic uncertainties.

Largest Liquidity Injection Under Governor Sanjay Malhotra

Under the leadership of Governor Sanjay Malhotra, the RBI has adopted an assertive liquidity strategy, driven by the combination of:

• A 100 basis point repo rate cut this fiscal
• A 100 basis point reduction in the Cash Reserve Ratio (CRR)
• Record OMO purchases to inject durable liquidity

These moves signal a strong pivot toward pro-growth monetary policy designed to energize credit expansion, support economic activity, and stabilise financial markets.

The liquidity push comes at a critical moment, with banks facing tighter funding conditions earlier this year due to elevated currency leakage, festival cash demand, and slower government spending. The RBI’s aggressive OMO program has helped bridge this gap.

Why RBI Is Flooding the Banking System With Liquidity

Surplus liquidity is essential for policy transmission, enabling banks to pass on the benefits of rate cuts to borrowers more effectively. The RBI’s strategy aims to:

• Reduce short-term borrowing costs
• Improve credit availability for businesses and households
• Maintain overnight rates close to the repo rate
• Ensure market stability amid global uncertainties

According to treasury desks, the current liquidity injections have been far more decisive than earlier cycles, reflecting the RBI’s intention to stay ahead of evolving market risks.

Market Expects More OMOs and FX Swaps in Coming Weeks

Bankers anticipate further liquidity support in the form of:

• Additional OMO purchases
• FX swap auctions to release rupee liquidity

According to Sameer Karyatt, Executive Director and Head of Trading at DBS Bank India:

“Expectations are leaning toward announcements of further OMOs and FX swap auctions to support rupee system liquidity and maintain overnight rates close to the repo rate.”

The comment underscores the market’s belief that the RBI will continue its interventionist stance, particularly as volatility increases globally due to rate cuts in major economies and fluctuating crude oil prices.

Long-Duration Yields Rise Despite Liquidity Push

While the RBI’s OMOs have helped ease rates in the medium part of the curve, long-duration bonds have experienced upward pressure this year. This is due to shifting investment patterns:

1. Reduced inflows into long-term insurance schemes

Insurance companies, traditionally the biggest buyers of long-dated bonds, have slowed their allocations.

2. Pension funds moving capital toward equities

Rallying stock markets have redirected pension fund investments away from fixed-income instruments.

These factors have widened the supply-demand imbalance for long-term securities, making the RBI’s actions even more crucial.

Bond Market Outlook: Yields May Trend Lower Toward Year-End

Analysts remain cautiously optimistic about the trajectory of yields in the coming weeks.

VRC Reddy, Treasury Head at Karur Vysya Bank, notes:

“I expect the 10-year bond yield to trend toward 6.50% by end-December as current market fears begin to ease. The RBI is likely to continue OMOs of ₹1–2 trillion during January and February, which should help narrow the demand-supply gap and stabilise market conditions.”

If RBI extends its OMO support into early 2026, yields may continue softening, providing relief to borrowers, portfolio managers, and government financing operations.

OMOs: More Than Just a Liquidity Tool

While open market operations are officially framed as a liquidity management mechanism, they often carry broader implications:

• They influence bond yields across the curve, not just short-term rates
• They stabilize market sentiment during periods of high volatility
• They provide pricing cues for government borrowing programs
• They shape expectations for future monetary policy

Given the scale of operations this year, OMOs have effectively become a major market-moving instrument, guiding yield expectations and influencing investor positioning across the fixed-income spectrum.

Conclusion: RBI’s Record Bond Purchases Signal Strong Policy Support

The RBI closing in on ₹3.16 trillion of OMO bond purchases in FY26 marks a historic moment for India’s financial markets. With another ₹50,000 crore operation scheduled next week and more liquidity actions expected in early 2026, the central bank appears committed to ensuring:

• Ample liquidity
• Smooth monetary transmission
• Stable bond yields
• Supportive financial conditions

As India navigates a complex global environment, the RBI’s proactive bond purchase strategy is expected to play a central role in maintaining economic stability and fostering growth momentum.

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Disclaimer: This article is based on information available from public sources. It has not been reported by EQMint journalists. EQMint has compiled and presented the content for informational purposes only and does not guarantee its accuracy or completeness. Readers are advised to verify details independently before relying on them.