RBI's Rs 80,000 cr OMO push drags 10-year government bond yield under 6.5%

Government bond yields tumbled on Wednesday, a day after the Reserve Bank of India announced ₹80,000 crore in Open Market Operation (OMO) purchase auctions, signalling a proactive stance to ease financial conditions ahead of the April monetary policy review. 

The yield on the 10-year benchmark government bond fell 10 basis points on the first trading day of the new financial year to settle at 6.48 per cent — the lowest in three years. The benchmark yield had already softened 15 basis points in March. 

Yields on the 15-year and 5-year bonds also declined by 9 basis points (bps). 

State-owned banks rushed to replenish their held-to-maturity (HTM) portfolios ahead of the auctions, further driving yields lower, according to dealers. 

 

The RBI’s decision to inject liquidity comes despite the banking system’s net liquidity flipping to surplus mode over the past four days — marking a turnaround after four months of deficit. 

The central bank plans to purchase ₹80,000 crore worth of government securities through four tranches of ₹20,000 crore each, scheduled for April 3, April 8, April 22, and April 29. 

“The market wasn’t expecting such aggressive OMO from the RBI. They (the RBI) could have allowed the deficit to run and waited for government spending to pick up. Instead, the immediate announcement clearly signals their intent to inject long-term liquidity,” said Alok Singh, group head of treasury at CSB Bank. 

The banking system’s net liquidity surplus stood at ₹1.42 trillion as of Tuesday, according to RBI data. 

“The key driver of the rally (in bonds) is the absence of selling by public sector banks. Many had already offloaded major positions in OMO auctions last year; they weren’t replaced during the last financial year. And in this financial year, they are actually under-invested. Aggressive profit-booking should not be happening at this level,” said a dealer at a primary dealership. 

Under revised investment guidelines, banks must permanently classify bonds as HTM, except for 5 per cent of the portfolio, which can be withdrawn during the year. Any deviations require approval from both the bank’s board and the RBI. However, banks can sell securities beyond this limit through OMO auctions. 

“Banks are replenishing portfolios, and liquidity has improved. The OMO auction announcement reinforces the RBI’s intent to ensure smooth transmission when rate cuts begin,” said the treasury head at a private bank. 

Market participants noted that the April-to-June quarter, a relatively slow credit season, allows banks to channel surplus funds into investments. Ample liquidity also drove cut-off yields on Treasury bills about 20 basis points lower in the weekly auction, with mutual funds snapping up the majority of T-bills on rollover demand. 

Yields on top-tier banks’ certificates of deposit also softened, falling between 50 basis points and 65 basis points across tenures as net liquidity surplus approached ₹1.5 trillion. The first trading day of the financial year saw muted fundraising through short-term debt instruments.