Bond yields ease after RBI’s `2-trn OMO announcement

Mumbai: India’s banking system liquidity has slipped into deficit over the past few days, large-ly due to the predictable year-end outflows linked to advance tax and GST payments. To ad-dress the tightening conditions, Reserve Bank of India has announced a fresh set of liquidity-infusing measures, comprising open market purchases of government securities and a long-tenor USD/INR swap.

The central bank will conduct OMO purchase auctions aggregating Rs2 trillion in four tranches of Rs50,000 crore each between end-December and late January, along with a $10 billion buy/sell swap for a three-year tenor. The announcement triggered an immediate relief rally in the bond market, with the 10-year benchmark yield easing by about 9 basis points from around 6.64 per cent to nearly 6.53 per cent.

Traders see the staggered Rs2 trillion OMO programme and the three-year FX swap as a clear intent to keep systemic liquidity comfortable through the quarter-end and into the new calendar year. Talking to Bizz Buzz, Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap, says, “This has helped anchor expectations that funding conditions will not tighten ab-ruptly, allowing bond yields to adjust lower in a more orderly manner instead of reacting in sharp stop-start moves. The measures have also reassured market participants that the Reserve Bank is prepared to act pre-emptively to prevent liquidity stress from spilling over into primary auctions and secondary market pricing.”

Looking ahead, sustained liquidity support is expected to be crucial for ensuring smooth com-pletion of Government of India bond auctions in the remaining part of the fiscal year. With net supply expected to taper off by mid-February, bond yields could gradually drift lower, poten-tially moving towards the 6.40 per cent level by March, he said.

A potential silver lining could emerge if external headwinds also ease—any meaningful strengthening of the rupee and greater clarity or resolution on US tariff-related issues by March would significantly improve sentiment and help yields sustain at lower levels.

However, market participants remain cautious about the period beyond March. Once fresh bor-rowing for the new fiscal year begins from April, supply pressures are likely to return, which could again place upward pressure on yields. Much will therefore depend on whether liquidity conditions continue to be actively managed and whether external risks evolve favourably, al-lowing the current relief rally to translate into a more durable trend in the government bond market.

On December 24, the yield on India’s 10‑year benchmark G‑Sec eased to 6.57 per cent, down 11 basis points (0.11 percentage points) from the previous close of 6.68 per cent. This was the biggest single‑day drop in about four months and is being described as a “rally” in the bond market, where falling yields mean rising bond prices.

Anil Kumar Bhansali, Head of Treasury at Finrex Treasury Advisors says, “The sharp decline in yield was triggered by the Reserve Bank of India’s announcement of a large liquidity package.”

The RBI announced Rs2 trillion of government bond purchases to be conducted in four tranch-es over December 2025 and January 2026. It also announced a $10 billion USD/INR buy‑sell swap, signalling strong support for liquidity and the rupee, he said.

These measures reversed earlier pressure from tight liquidity, tax outflows, and RBI dollar sales, which had pushed the 10‑year yield to a nine‑month high near 6.7 per cent earlier in the week. With the RBI stepping in, traders now expect yields to drift toward the 6.50 per cent area in the near term.

Just before this rally, the 10‑year G‑Sec yield had been rising due to supply worries (high state bond issuance), tight cash, and fading hopes of further rate cuts.

Over the past month, the yield had edged up by about 6 bps, but it remains about 24 bps lower than a year ago. The current level of 6.57 per cent is still above the recent lows around 6.50–6.55 per cent seen earlier in December, but well below the 6.7 per cent+ peak hit on 22 Decem-ber.

There are various implications for markets. The rally (fall in yield) is positive for existing G‑Sec holders and long‑duration bond funds, as bond prices rise when yields fall. Lower 10‑year yields reduce the benchmark for corporate bond yields and long‑term lending rates, though banks may not pass on the full move immediately. Easing bond yields can support equity valua-tions, especially rate‑sensitive sectors like banks and real estate, by lowering the discount rate on future earnings.