Indian government bonds witnessed a powerful rally on Wednesday, with the benchmark 10-year yield recording its most significant single-day decline in over seven months. This dramatic move came after the Reserve Bank of India (RBI) announced a substantial liquidity infusion plan, effectively calming market nerves over near-term supply pressures.
A Historic Plunge in Bond Yields
The benchmark 10-year bond yield closed at 6.5398%, a sharp drop from its previous close of 6.6328% on Tuesday. This marked the most substantial single-session plunge since May 13. It is crucial to remember that bond yields move inversely to prices; therefore, the falling yield indicates a strong surge in bond prices, reflecting heightened demand and improved investor sentiment.
Decoding the RBI's Liquidity Lifeline
The central bank's decisive action involves injecting approximately ₹2.90 trillion rupees (around $32.42 billion) into the banking system. This will be executed through a two-pronged approach between December 29 and January 22:
- Open market purchases of bonds worth ₹2 trillion rupees.
- A $10 billion three-year dollar-rupee buy/sell swap.
Economists viewed the move as a proactive step. Madhavi Arora, chief economist at Emkay Global Financial, noted that given the significant foreign exchange intervention by the RBI in recent weeks, which drained durable liquidity from the system, the announcement was not entirely surprising. "If FX pain continues, the liquidity drain could be significant, and thus a proactive RBI on liquidity infusion is a welcome move," Arora stated.
Context and Broader Market Impact
This liquidity push follows a period of market anxiety over elevated government bond issuance, which had pressured borrowing costs. Analysts estimate an aggregate debt supply of about ₹8.1 trillion rupees in the upcoming quarter. The RBI's intervention directly addresses these supply concerns.
The central bank has been active throughout the year in managing liquidity:
- In 2025, it has already purchased bonds worth a record ₹6.5 trillion rupees.
- It infused an additional ₹4.7 trillion rupees via foreign exchange swaps.
- It also slashed the cash reserve ratio for banks.
- Just in December, the RBI bought ₹1 trillion rupees of bonds and conducted a $5 billion forex swap.
The positive sentiment spilled over to other markets. India's overnight index swap (OIS) rates dropped across the curve, mirroring the fall in bond yields and reflecting improved confidence. The one-year OIS rate ended at 5.46%, the two-year at 5.54%, and the five-year rate eased by 5 basis points to settle at 5.9075%.
The RBI's hefty liquidity injection has successfully provided immediate relief to the bond market, underscoring its commitment to ensuring orderly market functioning and stabilizing borrowing costs as the new year approaches.
