RBI Sharpens Liquidity Playbook With April OMOs to Anchor Yields, Transmission

The Reserve Bank of India is no longer reacting to liquidity pressures—it is pre-empting them. By announcing ₹800 billion of government bond purchases this April, the central bank is actively shaping conditions for smoother monetary transmission, even as system liquidity returns to surplus.

Liquidity turned positive for the first time since mid-December, reflecting more than ₹5 trillion injected via bond purchases and FX swaps since January. Rather than ease off, the RBI is doubling down, signalling its intent to engineer a sustained surplus—a cushion that helps banks pass on previous and future rate cuts.

Bond buys will be spread across each week of April, ensuring a predictable flow of liquidity. With ₹1.83 trillion in variable rate repos maturing soon, the purchases are well-timed. More importantly, they reflect a structural strategy—not just firefighting—aimed at anchoring expectations and easing friction.

That clarity is crucial. In March, banks raised ₹2.25 trillion via certificates of deposit—nearly twice the amount a year earlier. The surge not only points to healthy credit demand but also to a growing imbalance: deposit growth remains sluggish. Without sustained support, liquidity could tighten.

By maintaining a surplus, the RBI is boosting the effectiveness of its rate cuts and reducing banks’ dependence on short-term funding. That makes loan pricing smoother, transmission faster, and credit flows more predictable.

Yield Control
Markets were slow to price in the February rate cut. The 10-year benchmark yield has fallen just 12 basis points since then—most of it in March when bond purchases resumed, and gilt auctions paused.

Open Market Operations—and the artificial demand they generate—have injected fresh momentum into a sluggish bond market. Trading had remained subdued through most of the last fiscal year, with tight liquidity and flat curves sapping the incentive to take positions. With the government kicking off its ₹14.8 trillion borrowing programme this month, restoring demand-supply balance is no longer optional.

The first test comes Friday with ₹360 billion of gilts on offer. The 10-year benchmark will now be auctioned every four weeks at a ₹300 billion size. Such frequency will weigh on yields. The RBI’s April bond buy calendar may be the only counterweight.

Further ahead, the challenge could grow. Currency volatility, tariff spillovers, or large FX interventions could re-tighten liquidity in May, especially as a chunk of the RBI’s forward book comes due. The central bank may need to scale up bond purchases or recalibrate the cash reserve ratio to stay ahead.

Liquidity is no longer a passive variable. It is central to policy effectiveness. In a world of shifting global dynamics and uneven domestic growth, proactive liquidity management is not a luxury—it is an imperative.

In a newspaper column on Monday, RBI Governor Sanjay Malhotra pledged that the central bank would remain proactive, agile, and flexible in its efforts to support growth. Policymaking, he said, must be both pragmatic and visionary for India to leapfrog into the next phase. April’s bond purchase calendar, then, is not merely a liquidity tool—it is a forward-leaning signal of the RBI’s intent to prioritise growth.