In a strategic move to enhance liquidity within the banking sector, the Reserve Bank of India (RBI) has conducted an open market operation (OMO), purchasing government securities worth ₹20,000 crore. This initiative is part of a broader plan to inject a total of ₹60,000 crore into the financial system over the coming weeks.

Details of the OMO Purchase

During the auction, the RBI acquired bonds maturing between 2033 and 2037, with cut-off prices ranging from ₹100.80 to ₹102.72. The central bank received bids totaling ₹1,20,626 crore, accepting ₹20,020 crore of these offers. The specific purchases included:

• ₹5,000 crore of the 6.79% 2034 bond at a yield of 6.67%
• ₹6,520 crore of the 7.18% 2037 bond at a yield of 6.85%
• ₹4,125 crore of the 7.10% 2034 bond at a yield of 6.74%
• ₹4,375 crore of the 7.18% 2033 bond at a yield of 6.77%

By selecting a mix of both liquid and illiquid bonds, the RBI aimed to manage market sentiments effectively. Notably, the central bank accepted certain amounts in the 10-year benchmark bond at prices higher than prevailing secondary market rates, thereby creating a balanced market sentiment.

Additional Liquidity Measures

Beyond this OMO, the RBI has announced further steps to bolster liquidity:

• Dollar-Rupee Buy/Sell Swap: Scheduled for January 31, the RBI will conduct a $5 billion swap with a six-month tenure.
• Upcoming OMO Purchase: Another OMO auction is planned for February 13, aiming to inject an additional ₹20,000 crore into the system.

Collectively, these measures are expected to infuse approximately ₹1.5 lakh crore into the banking system, addressing the liquidity deficit that has persisted since mid-December 2024.

Market Implications and Analyst Insights

The RBI’s unexpected decision to purchase government bonds has led investors to anticipate a potential interest rate cut in the upcoming monetary policy review. These bond purchases have resulted in a decline in bond yields and, alongside daily overnight repo auctions, have increased liquidity in the banking system. Analysts suggest that the RBI’s actions indicate a focus on facilitating banking liquidity and reducing market rates, which could precede interest rate reductions.

With the economy projected to slow to a four-year low in the 2024-25 period, and recent changes in the RBI’s rate-setting committee, investors are hopeful that the central bank will prioritize supporting economic growth. The RBI’s recent bond purchases, totaling ₹1,01,750 crore in the week ending January 17—the first such activity in over three years—have further fueled these expectations. Consequently, 10-year bond yields have fallen to nearly three-year lows, settling at 6.67%, close to the key repo rate of 6.50%.

Conclusion

The Reserve Bank of India’s recent initiatives, including the ₹20,000 crore government securities purchase and other liquidity-enhancing measures, underscore its commitment to ensuring adequate liquidity in the banking system. These actions are anticipated to have significant implications for interest rates and the broader economic landscape as the central bank navigates the challenges of sustaining economic growth amid evolving market conditions.