Bond market sees more OMO buys after RBI's surplus transfer falls short

Expectations of durable liquidity support via OMO rise after RBI's Rs 2.69-trn dividend transfer disappoints markets and currency leakage trends persist

 

The bond market expects the Reserve Bank of India (RBI) to conduct additional Open Market Operations (OMOs) in the latter half of the current financial year (FY26), particularly during periods of currency leakage. This anticipation arises in light of the RBI’s recent surplus transfer of ₹2.69 trillion to the government, which fell short of some market projections ranging up to ₹3 trillion.

 

The RBI dividend represents a substantial and durable infusion of liquidity into the system. However, its impact on system liquidity will become evident only when government expenditure begins to accelerate. Based on the expenditure pattern in FY25, the dividend would be largely spent by the end of June, according to experts.

 

That said, the timing and scale of government spending was likely skewed last year because of the general elections. As a result, the liquidity impact of the dividend is expected to play out more gradually this year—likely from late June through the end of August, said the experts.

 

“It does push out the need for OMO purchases towards H2FY26. We estimate incremental OMO purchases of ₹1.6 trillion in the remainder of FY26. This will keep the system liquidity surplus at 1 per cent of NDTL by March 2026. The estimate incorporates currency leakage of ₹2.7 trillion in FY26 and neutral infusion via foreign exchange (FX) intervention. There has been a pick-up in currency leakage from the end of FY25 which is persisting into FY26,” said Gaura Sengupta, chief economist, IDFC FIRST Bank. 

 

“Another key source of liquidity drain is redemption of government securities (g-secs) which RBI holds. Around ₹1.1 trillion are estimated to mature in FY26,” she added. 

 

Currently, system liquidity is averaging around ₹1.6 trillion, or 0.7 per cent of net demand and time liabilities (NDTL) in May 2025. This could rise to approximately ₹5 trillion, or 2 per cent of NDTL, by the end of August. The RBI Governor has previously indicated that a liquidity surplus of around 1 per cent of NDTL is considered adequate for effective monetary transmission.

 

“We might see some more OMO auctions, as it is a feasible tool right now for durable liquidity infusion and the RBI would like to ensure the rate cut transmission,” said a treasury head at a private bank.

 

Given the lower-than-expected surplus transfer, the bond market reacted with disappointment. The yield on the benchmark 10-year government bond was expected to edge slightly higher.

 

“Market had maintained expectations of close to ₹3 trillion. While it is higher than what was budgeted, the market expectations were raised to a higher level. We will see a slight rise in yields on Monday,” said Vijay Sharma, senior executive vice-president, PNB Gilts.

 

The benchmark yield had settled at 6.25 per cent on Friday. The yield had softened by 4 bps in the previous week in anticipation of a record surplus transfer.