The Reserve Bank of India (RBI) said Tuesday it would inject Rs 2.90 lakh crore of durable liquidity into the banking system through bond purchases and a dollar-rupee swap, as tight cash conditions push short-term rates above the central bank’s policy target.
The RBI said it would buy Rs 2 lakh crore of government bonds via open market operations (OMO) in four tranches of Rs 50,000 crore each - on December 29, January 5, January 12 and January 22.
It will also conduct a $10-billion buy/sell swap auction on Jan. 13 to ease dollar liquidity. The measures come as system liquidity turned negative mid-December, driving the weighted average call rate to 5.46%, above the 5.25% repo rate.
The Reserve Bank of India is injecting Rs 2.90 lakh crore into the banking system. This will be done through bond purchases and a dollar-rupee swap. These measures aim to ease tight cash conditions. Short-term rates have risen above the central bank's target. The RBI's intervention is expected to stabilize yields and improve market sentiment.
“The announced operations go beyond market expectations and should provide confidence around durable liquidity availability, alleviate demand-supply concerns, and support investor sentiment in the bond market,” said VRC Reddy, head of treasury, Karur Vysya Bank. “Overall, the RBI’s timely intervention is likely to stabilise yields and improve transmission across the curve.”
Between December 11 and 18, the central bank had infused Rs 1.45 lakh crore through OMOs and a $5-billion swap, but liquidity tightened again on tax outflows, lifting yields and forcing Power Finance Corp (PFC) to scrap a Rs 6,000-crore bond sale after bids came in at higher-than-expected coupons.
The 10-year benchmark yield has risen 20 basis points since Dec. 5 despite a quarter percentage point policy rate cut delivered in the latest policy review.
To be sure, the benchmark yield eased to 6.63% on Tuesday from 6.66% a day earlier, after touching 6.70% - the highest since March.
“The upward pressure on yields reflects adverse demand supply facing the market, with supply of state government bonds expected to rise in the fourth quarter of FY26,” said Gaura Sengupta, chief economist, IDFC First Bank.
State governments collectively raised Rs 33,720 crore through bond sales on Tuesday at cutoff yields higher than expected, as investors demanded steeper rates.
Liquidity conditions are expected to improve toward month-end as government spending returns to the system, traders said.
Separately, Bank of India raised Rs 10,000 crore long term infrastructure bonds at 7.23%. The government-owned bank received a total of 83 bids amounting to Rs.15,305 crore.
Out of this, the bank accepted 37 bids amounting to Rs. 10,000 crore, it said in a statement.
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