RBI bond holdings hit record high, may ease in months ahead, say traders

The RBI's bond holdings rose to 12.78per cent of the outstanding issuances as of March-end from 10.55 per cent at December-end, according to RBI data

The Reserve Bank of India's (RBI) holdings of Indian government securities climbed to a record in absolute terms following aggressive debt purchases, but analysts anticipate a reduction as the year progresses.

The RBI's bond holdings rose to 12.78per cent of the outstanding issuances as of March-end from 10.55per cent at December-end, according to central bank data released on Wednesday.

In absolute terms, this amounts to approximately 14.88 trillion rupees ($173.55 billion), a record high, marking an increase of 2.83 trillion rupees in the January-March quarter.

The central bank had purchased bonds worth 2.45 trillion rupees via open market operations (OMOs) and an additional 388 billion rupees through secondary market transactions in the quarter.

Analysts noted that the RBI's holdings might diminish in the coming months as some of the debt matures. The central bank holds between 500 billion rupees to 1 trillion rupees of securities that mature in this financial year.

"Holdings may further go up for the current quarter, but in most cases, OMOs are now behind us, especially after the central bank announced a reduction in cash reserve ratio and a reverse repo," said VRC Reddy, treasury head at Karur Vysya Bank.

The RBI aims to keep liquidity above 1per cent of deposits till March 2026, according to Gaura Sen Gupta, chief economist with IDFC First Bank.

To that end, it announced a 100 basis-point reduction in banks' cash reserve ratio, effective from September to December, in its policy meeting in June. The RBI also cut its repo rate by 50 basis points and shifted its policy stance to neutral.

"In our base case, we do not expect more OMO purchases" for the rest of this financial year, Sen Gupta said.

The central bank will also conduct a seven-day variable rate reverse repo auction for 1 trillion rupees on Friday. Market participants see this as part of the RBI's strategy to align the weighted average call rate closer to the repo rate, which will further tweak liquidity.

If growth undershoots the RBI's expectation, they may choose to loosen the liquidity valve, said Dhiraj Nim, an economist and FX strategist at ANZ Research.

Sen Gupta noted that additional OMO purchases would likely depend on significant capital outflows. "For now, in our base case, we expect balance of payments to be a small surplus in fiscal 2026," she said.