The Reserve Bank of India (RBI) has decided to sell government bonds worth a total of Rs 1 lakh crore under Open Market Operation (OMO) to infuse excess liquidity in the banking system. The objective of this measure is to absorb excess liquidity in the banking system, control the availability of cash and balance liquidity in the financial system. The OMO sale also aims to keep short-term interest rates in line with the policy stance of the RBI.
The RBI decision comes at a time when excess liquidity has increased in the Indian banking system. Due to excess cash, the overnight interest rate has started falling below the repo rate. The central bank is intervening to remove excess money from the system and maintain stability in the currency market.
Sale of government bonds in three phases
According to RBI, a total of Rs 1 lakh crore government bonds will be sold in three different phases. In the first phase, securities worth Rs 50,000 crore will be sold on September 17, 2026. After this, government bonds worth Rs 25,000 crore will be sold on 21 September and Rs 25,000 crore on 28 September.
The auction will be conducted under multi-security and multi-price process. According to the Central Bank, eligible bidders participating in the auction will have to submit their bids through the e-Kabir system. The time for submission of bids for the September 17 auction is scheduled from 9:30 am to 10:30 am. The results will be released on the same day.
The maturity period of the government securities to be sold will be between FY 2028-29 and FY 2031-32. This is RBI’s first pure OMO bond sale after a gap of almost two years.
Bond yield increased after OMO announcement
The Indian government bond market was under pressure after the announcement of the OMO sale. Bond yields rose on the prospect of an increase in the supply of government securities. India’s benchmark 10-year government bond yield rose nearly 6 basis points to 7.035 percent. Similarly, the 5-year government bond yield rose nearly 10 basis points to 6.6222 per cent. Rising bond yields generally reflect downward pressure on their prices.
Due to excess liquidity in the banking system
Many factors are being said to be behind the increase in liquidity in the Indian financial system in recent times. Banks collected more than expected under the Special Foreign Currency Deposit Scheme of RBI. This also led to a significant increase in the country’s foreign exchange reserves and increased rupee liquidity in the banking system.
When banks have excess cash, they can lend it to other banks for short periods of time. This puts pressure on interest rates in the overnight market and may go below the repo rate of the central bank. This situation is important for RBI in terms of effective implementation of monetary policy.
keep an eye on inflation
RBI’s liquidity management is happening at a time when crude oil prices are rising in the global market. India imports large quantities of crude oil for its energy needs. Therefore, a sustained rise in international oil prices may put upward pressure on domestic inflation and import costs.
Controlling excess cash can help the RBI balance monetary conditions. However, OMO sales can also affect bond yields, market borrowing costs, and broader financial conditions.