RBI’s OMO Purchases to Ease Bond Yields via Liquidity Boost

RBI Steps in with OMO Purchases Worth ₹1.25 Lakh Crore to Stabilize Bond Market

The Reserve Bank of India (RBI) has announced open market operation (OMO) purchases of government securities totaling ₹1.25 lakh crore across four tranches, aiming to inject liquidity and alleviate upward pressure on bond yields. This move comes in the wake of heightened geopolitical tensions following the April 22 terror attack in Pahalgam, Kashmir, which claimed 26 lives and triggered a sell-off in India’s bond markets.

Highlights:

• RBI to inject ₹1.25 lakh crore via OMO purchases in four tranches.

• Move aims to ease bond yields amid India-Pakistan geopolitical tensions.

• Announced auctions will be held on May 6, 9, 15, and 19.

Geopolitical Tensions Trigger Yield Spike in Benchmark Bonds

Market participants noted a sharp uptick in yields on the 10-year benchmark bond following the terror attack in Kashmir, reflecting investor concerns over India-Pakistan relations. The yield on the 6.79% 2034 government bond rose by 7–8 basis points, highlighting the nervousness in the fixed-income market.

• April 28 closing: The 10-year benchmark yield stood at 6.396%.

• Market reaction: The Pahalgam attack led to dampened sentiment and triggered a modest sell-off.

Highlights:

• Benchmark bond yields rose by 7–8 bps post-attack.

• Investors turned risk-averse amid cross-border concerns.

OMO Purchases to Support Liquidity and Curb Yield Volatility

According to V Ramachandra Reddy, DGM and Head of Treasury at The Karur Vysya Bank, the OMO purchase decision was made to maintain durable liquidity conditions. Despite current surplus liquidity in the banking system, potential drains are expected due to upcoming maturity of forward foreign exchange sales, prompting RBI’s proactive response.

• Liquidity management: OMOs will ensure continued surplus despite potential forex-related drains.

• Tranche structure:

  • ₹50,000 crore on May 6

  • ₹25,000 crore each on May 9, May 15, and May 19

Highlights:

• OMOs seen as pre-emptive support against expected forex-related liquidity pressure.

• RBI continues its commitment to liquidity assurance through staggered bond purchases.

Sentiment Management and Strategic Bond Yield Moderation

A treasury head at a leading state-owned bank suggested that the RBI’s move is as much about market sentiment as liquidity. By signaling intent to manage liquidity amid heightened tensions, the RBI aims to steady investor nerves. Additionally, the OMO injection may help lower the coupon rate on the new 10-year benchmark bond scheduled for auction on May 2.

• New benchmark bond: Announced after the existing bond hit its cap of ₹1.84 lakh crore.

• Coupon management: Infusion could aid in keeping the new bond’s coupon lower amid yield pressure.

Highlights:

• RBI likely seeks to support sentiment and lower coupon on new bond issue.

• Liquidity surplus to buffer impact from geopolitical uncertainty and sustain bond demand.