RBI should include liquid papers in OMOs for better yield signalling: SBI

For a meaningful impact on yields, the Reserve Bank of India should consider open market operations (OMOs) in liquid papers, preferably the current 10-year benchmark and the preceding 10-year paper, the State Bank of India said in a report.

 

On Wednesday, the yield on the 10-year benchmark settled at 6.70 per cent, two basis points lower than the previous close.

 

“We propose that RBI does OMO in papers that are liquid to make a meaningful impact on yields. For example, the current 10-year paper is 6.48% 2035. The RBI can do OMO in just the preceding 10-year paper that is 6.33% 2035, the immediate outgoing benchmark paper. This will ensure yield curve signalling in the most recent liquid paper that could revive market sentiments across different segments,” the report said.

 

Despite a cumulative 125 basis point cut in the repo rate and record liquidity injections of about Rs 6.6 trillion during the current financial year, yields remained elevated.

 

Such a level of liquidity management has resulted in asymmetric transmission across market segments, the report said.

 

The report noted that banking system liquidity remained in surplus mode since April 2025, supporting transmission of policy rates. However, the surplus has been declining since August 2025 and average liquidity surplus is currently at around Rs 0.4 trillion, or 0.2 per cent of net demand and time liabilities, in January.

 

While transmission to money market rates showed a mixed pattern. According to the report, commercial paper and certificate of deposit yields declined sharply during 2025 but began rising again from August despite further easing of monetary policy. Similarly, the 10-year AAA corporate bond yield, after declining until early June, started moving up thereafter, reflecting higher risk premia.

 

The average spread of the 10-year AAA corporate bond over government bonds, which was around 42 basis points in April 2024, increased to 71 basis points in June 2025 and has remained unchanged at 71 basis points in January so far. “Thus, the market has started charging higher risk premia,” the report said.

 

The report highlights a sharper asymmetry in state government borrowing. Weighted average yields on state development loans (state government bonds) during April–December 2025 stood at 7.16 per cent, only marginally lower than the previous year, despite large OMO support from the RBI.

 

On Wednesday, the yield on the 10-year benchmark fell after the central bank announced the advancement of OMO operations. This turned market participants optimistic that the RBI may conduct more OMO operations and even increase the quantum to Rs 1.5 trillion in February, as opposed to Rs 1 trillion earlier.

 

However, the buying momentum remained subdued as the market awaited the central government’s borrowing announcement in the Union Budget.

 

“The market was only a tad up, but the real test is the borrowing announcement. Supply pressure is still high, which limits participation in the market, as players are not very keen on buying G-secs, especially PSU banks,” said a dealer with a state-owned bank.

 

Meanwhile, the rupee reversed its gains towards the end of the day despite a weak dollar index, as importers bought dollars due to month-end demand for the greenback. During the day, state-run banks were seen selling dollars on behalf of the central bank, which helped limit the currency’s losses, according to traders. The Indian unit ended the day at 91.79 per dollar, 0.07 per cent lower than its previous close.