The Reserve Bank of India (RBI) is set to conduct open market operations (OMO) bond sales amounting to ₹1 trillion throughout September. This announcement, made shortly after RBI Governor Sanjay Malhotra discussed various strategies to manage the recent surge in liquidity, is aimed at absorbing excess funds from the banking system. The decision comes in response to a lackluster interest in the central bank's latest variable rate reverse repo (VRRR) auction, which underscored the challenges in managing the current liquidity situation.
As per the latest data from the RBI, the net liquidity in the financial system is currently at a surplus of ₹10.43 trillion, with core liquidity estimated between ₹13 trillion and ₹14 trillion. The OMO sales are intended to withdraw durable liquidity, while the VRRR auctions are designed for transient liquidity needs. In an interview with CNBC-TV18, Malhotra confirmed that the RBI possesses a variety of tools to tackle the liquidity issue, including OMOs and swaps, while expressing skepticism about the effectiveness of VRRRs.
- Three OMO Tranches Scheduled — The bond sales will occur in three phases: ₹50,000 crore on September 17, followed by ₹25,000 crore on September 21 and September 28.
- Current Liquidity Surplus — The liquidity surplus is primarily attributed to the mobilization of $127 billion in FCNR(B) deposits.
- Interest Rate Expectations — Analysts are anticipating a potential increase in the repo rate during the upcoming monetary policy meeting scheduled for October 5-7.
Governor Malhotra indicated that while increasing the cash reserve ratio (CRR) is an option, the RBI is cautious given the recent exemptions for FCNR(B) deposits raised through the concessional swap window. Currently, the overnight weighted average call rate (WACR) is trading close to the Standing Deposit Facility (SDF) rate, settling at 5.02%, compared to 4.98% from the previous day. This low WACR is largely a result of the surplus liquidity in the banking system.
Market analysts are predicting that the upcoming OMO sales could lead to a rise in bond yields. The yield on the benchmark 10-year government bond recently increased by 5 basis points, reaching 7.01%, marking its first breach of the 7% threshold since June 3, 2026. The 5-year bond yield also rose by 7 basis points to settle at 6.59%. According to a note from Soumya Kanti Ghosh, Group Chief Economic Adviser at the State Bank of India, the 10-year yields are expected to move higher, potentially reaching around 7.15% or more, as various market factors come into play.
In conclusion, the RBI's strategy of utilizing OMO sales in conjunction with VRRRs and swaps signifies a proactive approach to liquidity management. This move is likely to influence the bond market dynamics, with the 10-year yield predicted to fluctuate between 6.98% and 7.05% in the near term. Market participants are closely monitoring these developments, especially with expectations of further OMO interventions targeting the shorter end of the yield curve.
