Mint Quick Edit | RBI’s bond-buying aims to soften yields as debt investors await India’s budget for cues

RBI Steps In Amid Yield Surge

Government bond yields in India have climbed to their highest levels in nearly 11 months, driven by surging state borrowings and persistent liquidity shortages that have reignited fears of an oversupply in the market. The benchmark 10-year bond yield touched 6.72 percent recently, up sharply from previous sessions, reflecting investor jitters over the fiscal path ahead. States have already offloaded bonds worth tens of thousands of crores and are gearing up for record borrowing in the coming quarter, putting immense pressure on the debt market. In response, the Reserve Bank of India has moved swiftly, advancing its bond repurchase plans to inject much-needed stability. These actions signal the central bank's determination to keep borrowing costs in check for the government at a critical time.

The RBI's interventions include two large-scale bond purchase auctions totaling one lakh crore rupees, now scheduled earlier than planned—one on January 29 and another on February 5, each worth 50,000 crore rupees. This fast-tracking comes as market sell-offs intensify, forcing the central bank to deploy open market operations ahead of schedule. Additionally, a 90-day variable rate repo auction of 25,000 crore rupees is set for January 30, providing short-term relief that reverses in late April. These measures aim to ease the immediate strain on liquidity, which has been tight due to various factors including stalled rate transmission from policy adjustments.

Liquidity Boost Through Swaps and Repos

Beyond domestic bond buys, the RBI is rolling out a significant dollar-rupee buy/sell swap worth 10 billion dollars, scheduled for February 4 with a three-year tenor. This operation is expected to pump in durable rupee liquidity equivalent to around 90,000 crore rupees, offering longer-term support to the financial system. Such swaps have become a key tool in the RBI's arsenal to manage currency pressures and ensure steady rupee availability without directly impacting foreign reserves in a volatile global environment. Together, these steps are projected to inject over 23 billion dollars in liquidity through a combination of bond purchases and foreign exchange operations, underscoring the scale of the challenge.

Market participants have welcomed these moves, though some caution remains due to ongoing rupee weakness that has somewhat offset the initial positivity from RBI's bond-buying announcements. The rupee's slide has added to the headwinds, making it harder for yields to stabilize fully. Investors are closely monitoring how these infusions play out, especially with gross government borrowing expected to hit between 16 and 17.5 lakh crore rupees in the next fiscal year. The combination of high supply expectations and tight conditions has kept sentiment cautious, even as the RBI works to bridge the gap.

"The RBI's proactive liquidity measures, including advanced bond repurchases and forex swaps, are crucial to anchoring yields at a time when state borrowings are peaking and budget uncertainties loom large. This should help maintain orderly market conditions ahead of key policy announcements," said a senior fixed-income strategist at a major Mumbai-based brokerage.

As debt investors turn their gaze to India's upcoming union budget, the stakes couldn't be higher. The budget will outline the government's detailed borrowing calendar and fiscal consolidation plans, providing the cues needed to gauge future supply dynamics. With states already pushing record issuances—planning up to five lakh crore rupees in the January-March quarter—the center's roadmap will be pivotal. Analysts expect the budget to balance growth imperatives with deficit control, but any surprises in expenditure or revenue assumptions could sway yields further. The RBI's current playbook buys time, softening the immediate yield hardening while markets await these fiscal signals.

Implications for Markets and Economy

These developments carry broad implications for the broader economy. Lower yields facilitated by RBI actions would ease the government's interest payments, freeing up resources for capital spending and welfare schemes. For banks and financial institutions holding large bond portfolios, stabilized yields prevent mark-to-market losses that could ripple through balance sheets. Corporates eyeing fresh debt issuances would also benefit from a calmer yield environment, potentially spurring investment activity. However, persistent liquidity tightness highlights deeper challenges in monetary transmission, where policy rate cuts haven't fully flowed through to lending rates, hampering growth momentum.

Looking ahead, the success of these measures hinges on coordinated fiscal-monetary efforts. If the budget delivers a credible borrowing plan and steps up revenue mobilization, it could restore investor confidence and allow yields to moderate sustainably. Conversely, aggressive spending without offsets might prolong supply pressures, testing the RBI's liquidity toolkit further. For now, the central bank's aggressive stance demonstrates its commitment to financial stability, a cornerstone for India's economic aspirations amid global uncertainties.

In summary, the RBI's accelerated bond buys and liquidity injections are timely responses to spiking yields fueled by state borrowings and tight conditions, setting the stage as investors anticipate budget clarity for sustained market relief.