Indian government bonds staged a powerful rally on Wednesday, with the benchmark 10-year yield recording its most significant single-session drop in over six months. This surge in bond prices, which move inversely to yields, was triggered by the Reserve Bank of India's (RBI) announcement of substantial new measures designed to ease tight liquidity conditions in the financial system.
Details of the RBI's Liquidity Injection Plan
The rally followed late-Tuesday measures from the central bank aimed at infusing approximately ₹2.9 lakh crore into the banking system between December 29 and January 22. The RBI unveiled a two-pronged strategy: conducting ₹2 lakh crore worth of open market (OMO) bond purchases in four tranches over December and January, and executing a $10 billion, three-year dollar-rupee buy/sell swap next month.
This planned infusion is notably double the size of the liquidity injection announced earlier in December. It is widely seen as an effort to offset the cash drain caused by the RBI's recent dollar sales, which were intended to support the rupee—the worst-performing Asian currency this year. The measures arrived after the benchmark 10-year yield had climbed to a nine-month high earlier in the week, driven by market anxieties over tight liquidity and elevated government debt supply.
Market Reaction and Expert Commentary
On the back of the RBI's announcement, the yield on the benchmark 10-year government bond fell nine basis points to 6.54%, down from 6.63% on Tuesday. This marked the sharpest single-day decline since mid-May. Bond dealers now anticipate the yield could drop further to around 6.5% as the market's liquidity situation gradually improves.
However, initial market enthusiasm was somewhat tempered. Dilip Parmar, a research analyst at HDFC Securities, noted, "Despite the central bank’s announcement of USDINR swaps and Open Market Operations (OMO), the measures failed to ignite market enthusiasm as they did little to bridge the widening gap between dollar supply and demand ahead of year end."
In contrast, other analysts viewed the move positively, particularly its timing and scale. Nathan Sribalasundaram of Nomura Securities stated, "The injection across these two instruments of approximately ₹2.9 lakh crore is more than we expected. Beyond the size, we see the timing as positive, as our conversations with market participants suggested expectations for RBI to announce new measures before year-end were limited."
Broader Implications for Borrowing Costs and Growth
The latest steps add to the RBI's ongoing efforts to keep borrowing costs stable and support economic growth. This intervention comes at a time when lenders' overnight borrowing costs have risen sharply due to factors like tax-related outflows and the central bank's foreign exchange interventions.
Sribalasundaram added an important nuance, explaining that while overall system liquidity is likely to remain in surplus, key short-term rates like the Mumbai Interbank Offered Rate (MIBOR) are unlikely to fall below the repo rate. This is because the RBI retains the ability to withdraw short-term liquidity even as it injects these more durable funds.
The concerted action underscores the central bank's proactive stance in managing liquidity to ensure the smooth functioning of financial markets and to provide a stable environment for credit growth as the economy navigates global headwinds.
