RBI completes bond buys, takes FY26 total to a record high of ₹3.16 trn

The central bank bought 500 billion rupees ($5.53 billion) of bonds at higher-than-expected cutoff prices, lifting secondary-market yields

The Reserve Bank of India on Thursday completed the first of two open-market bond purchases for December, taking its debt buys this financial year to a record ₹3.16 trillion. The central bank bought ₹50000 crore ($5.53 billion) of bonds at higher-than-expected cutoff prices, lifting secondary-market yields.

 

It is slated to buy another 500 billion rupees next Thursday, and with nearly three-quarters of purchases concentrated in six- and seven-year maturities, traders expect the 10-year 6.33 per cent 2035 bond to be included in the next operation.  The 10-year benchmark yield fell almost six basis points to about 6.60 per cent after threatening a break below 6.65 per cent -6.66 per cent earlier in the day.

  The RBI, under Governor Sanjay Malhotra, has aggressively added liquidity to the banking system to reinforce the impact of recent rate cuts. The central bank has lowered the repo rate by 100 basis points this fiscal to 5.25 per cent and cut the cash reserve ratio by another 100 basis points. 

Surplus liquidity improves policy transmission by giving banks more cash to lend. Bankers and traders expect more support.

"The expectations are leaning more towards announcements of further OMOs and FX swap auctions to support rupee system liquidity and thereby maintain overnight rates close to the repo rate," said Sameer Karyatt, executive director and head of trading at DBS Bank India.  Longer duration bond yields have also risen this year, as inflows in insurance schemes have reduced, while pension funds have diverted funds in equities.  "I expect the 10-year bond yield to trend towards 6.50 per cent by end of December, as current market fears begin to ease. RBI is likely to continue with OMOs of ₹1-2 trillion during January and February, which should help narrow the demand-supply gap and stabilise market conditions," said VRC Reddy, treasury head at Karur Vysya Bank.  Even as the OMOs are primarily used for liquidity management, they tend to have a larger impact on bond yields.