The Reserve Bank of India (RBI) took a strong step to ease liquidity conditions in the financial system, announcing a ₹400 billion bond purchase and a ₹1.5 trillion 43-day repo operation scheduled for Thursday. These moves are part of its ongoing efforts to stimulate the economy and improve policy rate transmission.

This is the latest in a series of actions by the central bank as it continues with its rate-easing cycle, having cut the repo rate for the second consecutive time last week and shifted its policy stance from "neutral" to "accommodative."

Why This Matters for the Financial System

RBI Governor Sanjay Malhotra emphasized the need to maintain a comfortable liquidity surplus, targeting a level around 1% of net banking system deposits. Based on deposit levels, this surplus translates to ₹2.2 trillion–₹2.5 trillion, while the average surplus currently stands at about ₹1.7 trillion this month.

This extra liquidity is seen as critical to support credit growth, lower borrowing costs, and transmit monetary policy changes more effectively across the economy.

Bond Markets React with Enthusiasm

Bond yields fell sharply across tenures following the announcement:

• 10-year benchmark bond yield declined by 3 basis points to 6.41%.

• Three-year and five-year bond yields dropped by 5–6 basis points to 6.12% and 6.17%, respectively.

These are the lowest yield levels in over three years, signaling strong investor confidence in the RBI’s move and expectations of continued support.

What Analysts Are Saying

Experts believe the RBI may still need to inject more durable liquidity in the months ahead.

“The indicative commitment may still require net durable liquidity injection of around ₹3 trillion. Out of this, we expect around 90% to be via OMO purchases and the rest via FX swaps,” said A Prasanna, head of research at ICICI Securities Primary Dealership.

“RBI’s surprise announcement demonstrates its commitment to maintain ample liquidity. This move is likely to sustain the bullish momentum in yields, potentially driving 10-year yield below 6.40%, with shorter duration bond yields witnessing a further slump,” added VRC Reddy, Treasury Head at Karur Vysya Bank.

Broader Implications of the Move

The RBI’s action sends a strong signal to markets and financial institutions. It underscores the central bank’s focus on propping up growth through easier financial conditions, especially amidst external headwinds like global inflation trends, geopolitical uncertainty, and volatile commodity prices.

The liquidity injection also helps:

• Improve bank lending capacity

• Enhance corporate credit availability

• Lower borrowing costs for businesses and individuals

• Support capital markets and long-term infrastructure investment

What to Expect Going Forward

Market participants anticipate the RBI to maintain its accommodative policy stance for the foreseeable future. The central bank may consider additional OMO (Open Market Operation) purchases or forex swaps to ensure surplus liquidity remains above the desired threshold.

As India navigates a recovery phase, smooth monetary transmission backed by sustained liquidity will play a crucial role in economic revival and stability.

Conclusion

With the latest liquidity infusion, the RBI has reaffirmed its commitment to economic growth and financial system stability. By ensuring sufficient surplus in the system, the central bank sets the stage for faster and more efficient policy rate transmission, making borrowing cheaper and credit more accessible.

The bond market’s bullish response and the sharp drop in yields further validate the move, suggesting investor confidence in the RBI’s direction. All eyes will now be on Thursday’s operations and how the RBI plans its next steps to nurture a healthy growth environment in 2025.

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