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Informist, Thursday, Nov. 13, 2025

 

By Aaryan Khanna

 

NEW DELHI – Bond market traders are eagerly awaiting data scheduled for Friday to confirm the Reserve Bank of India's secondary-market gilt purchases, which the market has been speculating about over the past week. The central bank may have bought nearly INR 300 billion in government bonds since Nov. 3, with around INR 180 billion in the week to Nov. 7. This is seen as a precursor to bond purchases through open-market auctions as soon as next month, dealers said.

 

The RBI will release on Friday data on its liquidity operations for the week ended Nov. 7, including its secondary market gilt trades. Per data from the Clearing Corp. of India, which runs the electronic trading platform for government bonds, the segment it identifies as 'others' – which includes the central bank – bought gilts worth INR 205 billion in the secondary market between Nov. 3 and Nov. 7. Since the week was truncated by a holiday, this was the best four-session stretch for 'others' gilt buys since June 2023, and topped the weekly size of such purchases seen in January this year.

 

The central bank last bought gilts in a significant quantum in the secondary market in the latter half of January, mopping up INR 388.15 billion within two weeks. It then proceeded to buy gilts at OMO auctions over the next four months, shoring up its bond portfolio by INR 5.2 trillion by May. This infusion of liquidity, albeit belatedly, reversed the liquidity drain caused by its interventions in the foreign exchange market. A repeat could be in store now, as durable liquidity has shrunk to INR 3.60 trillion on Oct. 17 from nearly INR 6 trillion in July, the latest data showed. Economists have estimated that durable liquidity would have further fallen to INR 3.3 trillion by October-end.

 

"The RBI had shown a similar pattern in January. It began with on-screen buys before moving on to auctions. That could be the strategy again," Gaura Sen Gupta, chief economist at IDFC FIRST Bank, said. "The timing depends on the pace of the forex intervention – I see December at the earliest, but OMO auctions in Jan-Mar are almost certain."

 

In a note earlier this week, the IDFC Bank economist had said the RBI would need to infuse INR 2 trillion in durable liquidity by March to support the transmission of its monetary policy. She joined economists from QuantEco Research and Kotak Mahindra Bank in expecting OMO auctions after the RBI's dollar sales to protect the rupee against the greenback had drained rupee liquidity by more than INR 1 trillion in October alone. Sen Gupta said the purchases may be triggered by durable liquidity falling below 1% of banks' net demand and time liabilities, which is about INR 2.4 trillion, according to the latest data.

 

Bond traders speculated that the RBI's action was more focused on bringing down gilt yields than dealing with liquidity immediately. The durable liquidity calculation does not account for the last two tranches of the cut in the cash reserve ratio of banks on Nov. 1 and at the end of November. Together, these are expected to bolster durable liquidity by around INR 1.4 trillion, which may be enough to see out the December quarter without an OMO auction. Call money market traders said the durable liquidity addition from the RBI's estimated purchases of around INR 300 billion since Nov. 3 has not materially changed liquidity conditions.

 

Moreover, market participants speculate the RBI's on-screen bond purchases began the next trading day after it rejected bids for INR 110 billion of the 6.28%, 2032 bond at the weekly auction on Oct. 31, with the expected poor bids having driven the yield on the then-benchmark 6.33%, 2035 bond to 6.60%. By restricting its purchases so far to the secondary market, traders say the RBI is ensuring the government's borrowing programme goes through as cheaply as possible. A majority of the speculated purchases by the RBI are said to have occurred in the 6.33%, 2035 bond, the most-traded gilt and the erstwhile 10-year benchmark. 

 

"RBI will continue to buy in the secondary market until the next policy. As the last tranche of 25 bps of CRR reduction is yet to be implemented, I believe the RBI will provide clarity on its OMO strategy in the upcoming policy meeting," V.R.C. Reddy, head of treasury at Karur Vysya Bank, said. "If we go by the RBI's intent, it appears the central bank is not comfortable with yields at the current levels, given the prevailing monetary conditions."

 

Though the pace has slackened, the 'others' category has also net bought INR 110 billion of gilts this week already through Wednesday. This has put to rest some concern in the market that the RBI's activity in the bond market last week was largely to replenish its bond holdings after the redemption of the 5.15%, 2025 gilt on Sunday. The RBI is speculated to have held INR 150 billion to INR 300 billion of the matured 2025 gilt.

 

ICICI Securities Primary Dealership estimated the RBI's holding of the bond that matured on Sunday at INR 250 billion to INR 300 billion, about the size of the net purchases by 'others' between Nov. 3 and Wednesday. Earlier, the RBI used to switch its holdings of short-term maturities with the government, but has mostly discontinued this practice since 2023. In May this year, the central bank switched INR 373 billion of two bonds maturing in 2026-27 (Apr-Mar) with the government, skipping bonds maturing in the current fiscal.

 

"The RBI doesn't have any pre-set policy on what it does on the maturity of a bond, so any bond buying that the RBI did last week would be looking at the broader fundamentals," Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, said. "Drawing a one-to-one correlation to the maturity (of the 5.15%, 2025 bond) is a reductive view, in my opinion."

 

Even those who see a link between the two have reason to cheer – market estimates for the RBI's holding of the 7.59%, 2026 bond maturing on Jan. 11 range between INR 400 billion and INR 500 billion, up to half of its total outstanding. As the quantum of RBI buys increases, traders increasingly expect large state-owned banks to start pushing for open-market operations auctions.

 

A switch to an auction-based strategy will boost banks' profitability, dealers said. Banks can sell gilts from their held-to-maturity books to the RBI at OMO auctions, bypassing the 5% limit on sales from this portfolio in a financial year. This exemption is not available when the RBI buys bonds in the secondary market. With the RBI now seen as active on expanding its bond purchases again, traders see OMO auctions as nearly inevitable in the last quarter of FY26.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

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