RBI's massive ₹1.25 lakh crore bond purchase signals strategic liquidity shift | cliQ Latest

In an unexpected move, the Reserve Bank of India (RBI) announced it would inject ₹1.25 lakh crore into the financial system through government bond purchases, sparking discussions across financial markets. Despite already having surplus liquidity, the central bank’s step is seen as a strategic pre-emptive measure, possibly aimed at managing future cash crunches, influencing bond yields, and easing conditions for banks.

The RBI will carry out these open market operations (OMOs) in four tranches between May 6 and May 19. The first auction on May 6 will involve ₹50,000 crore, followed by ₹25,000 crore each on May 9, 15, and 19. The size and timing of this operation caught many by surprise, particularly because the market currently holds excess liquidity of over ₹1 lakh crore.

Anticipated cash shortages and past actions

Several theories explain the RBI’s motivation. One possibility is that earlier dollar sales by the RBI sucked rupees out of the system, and this move might be a way to replenish that liquidity. Additionally, with a government dividend expected in May, some believe further liquidity is on the way, making this large injection even more puzzling.

Analysts also suggest the RBI might be preparing for a significant cash shortfall of nearly ₹4 lakh crore later this year. Festival seasons typically see heavy cash withdrawals, and reserve requirements from banks could tighten liquidity further. Maturing government bonds worth around ₹1 lakh crore held by the RBI could also reduce cash in the system when repayments occur.

Impact on bond yields and banking sector

The central bank’s action is likely to bring down bond yields, especially on the benchmark 10-year government bond, potentially moving them closer to 6.3%. This drop would benefit banks in two ways: they could reduce deposit rates more easily and see the value of their existing bond portfolios increase.

Samiran Chakraborty, Chief Economist at Citi India, noted that this move represents a shift in the RBI’s strategy. Instead of reacting to short-term liquidity pricing signals, the central bank appears to be targeting a specific liquidity buffer—around 1% of net demand and time liabilities (NDTL)—and is methodically working toward it using OMOs.

This shift in approach underlines the RBI’s focus on managing liquidity proactively, rather than reactively, to ensure smoother financial functioning in the months ahead.

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