RBI Injects $5.5 Billion via Bond Buys to Ease Liquidity Pressures

India's Central Bank Injects $5.5 Billion into Banking System

India's central bank injected $5.5 billion into the banking system through bond purchases in its first open market operation (OMO) since May, aiming to ease liquidity strains. The Reserve Bank of India (RBI) bought bonds with maturities spanning from 2029 to 2050, with the majority of purchases concentrated in the six- to seven-year buckets. The move follows a broader liquidity plan to inject 1.45 trillion rupees ($16.15 billion) into the system in December, including a $5 billion foreign exchange swap.

The auction results showed that yields fell after the RBI disclosed the cutoff prices, which were mostly above estimates from a Bloomberg News poll. The central bank's bond purchases are part of a strategy to counteract cash drains from its rupee-stabilization efforts and seasonal liquidity challenges. The benchmark 10-year bond yield has risen nearly 12 basis points this week despite the RBI's rate cut and liquidity measures.

In a separate announcement, RBI Governor Sanjay Malhotra confirmed that the central bank would conduct a $5 billion three-year USD/INR buy-sell swap auction on December 16. This forex swap is intended to bolster liquidity while managing foreign exchange pressures. The swap will be conducted alongside two OMO purchases of government securities, totaling 1 trillion rupees, to stabilize the banking system.

Why the Liquidity Measures Matter

India's rupee has been one of the worst-performing currencies in Asia, leading to increased foreign exchange intervention by the RBI. These interventions, combined with seasonal strains, have drained liquidity from the system, prompting the central bank to take decisive action. The OMO bond purchases and forex swaps are designed to offset these outflows and maintain stable interest rates according to the central bank's December plan.

The RBI has also faced headwinds in the bond market, with global rates repricing and a likely end to the domestic rate-cut cycle. A demand-supply imbalance has also contributed to weaker bond prices. By injecting liquidity, the central bank aims to provide relief to banks, allowing them to continue lending and supporting economic growth.

How Markets Reacted

The bond market reacted mixedly to the RBI's OMO announcement. While most sovereign bonds rose on Friday after the rate cut and liquidity injection plans were announced, the benchmark 10-year bond was excluded from the first auction, triggering a selloff and dragging the whole yield curve lower. Traders expressed disappointment over the exclusion, noting it signaled a shift in central bank priorities.

In early trading on Monday, however, bond prices rebounded as buyers found value in various maturities. The 10-year yield remained flat due to dry trading interest, while longer-duration bonds saw strong buying, especially from private sector banks. Overnight index swap (OIS) rates were also flat to slightly higher amid a subdued market after the policy announcement according to economic data.

What Analysts Are Watching

Analysts are closely monitoring how the RBI manages the balance between liquidity support and currency stabilization. Madhavi Arora, lead economist at Emkay Global Financial Services, suggested the central bank may need to inject up to 800 billion rupees in the March quarter, depending on the scale of its foreign exchange operations and balance of payments pressures.

The RBI has also initiated discussions with banks to standardize service fee disclosures and eliminate overlapping charges, signaling a broader focus on customer service and financial inclusion according to financial reports. These discussions reflect the regulator's ongoing efforts to streamline banking operations and improve transparency for consumers.

The central bank's dual approach of forex swaps and OMOs is seen as a strategic move to manage both domestic and external liquidity. By providing additional rupee liquidity, the RBI aims to support credit flow to small and medium enterprises and individual borrowers, fostering economic resilience.

Risks to the Outlook

Despite the central bank's proactive measures, several risks remain. The rupee's volatility continues to be a concern, with the RBI emphasizing that it allows market forces to determine its value. However, it remains committed to curbing excessive swings and maintaining confidence in the currency.

Foreign investor outflows have also weighed on the bond market, adding pressure to yields. Traders noted that ongoing foreign exchange interventions and the timing of liquidity injections will be key to sustaining market stability in the coming months.

The RBI's broader economic outlook for 2026 remains cautiously optimistic. Governor Malhotra highlighted the strength of India's external sector, including a current account deficit of about 1% and robust services exports and remittances. These fundamentals provide a buffer against external shocks and support the central bank's confidence in managing financial conditions.

What This Means for Investors

For investors, the RBI's liquidity measures signal a supportive environment for credit and economic activity. The lower interest rates and increased liquidity should encourage borrowing and investment, particularly in sectors reliant on credit. The central bank's focus on market stability and financial inclusion also benefits retail investors and SMEs.

However, investors should remain cautious about the impact of rupee volatility and foreign outflows on bond markets. The exclusion of the 10-year bond from the first OMO has created uncertainty, and future auctions will need to be closely monitored for any shifts in policy emphasis.

The RBI's December liquidity plan underscores its commitment to managing evolving market conditions. By combining OMOs and forex swaps, the central bank aims to ensure orderly financial conditions and support long-term economic growth. This approach provides clarity for investors and reinforces confidence in India's monetary framework according to central bank communications.