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Informist, Wednesday, Jan. 28, 2026

 

NEW DELHI – The Reserve Bank of India needs to innovate on open market operations as a better signalling device for government bond yield transmission, State Bank of India said in a research report Wednesday. The central bank should include more liquid papers to make a meaningful impact on yields, as its record OMO purchases in 2025-26 (Apr-Mar) have resulted in asymmetric liquidity transmission.

 

"The RBI can do OMO in just the preceding 10-year paper, that is 6.33 35, immediate outgoing benchmark paper," the report, authored by SBI Group Chief Economic Adviser Soumya Kanti Ghosh, said. "This will ensure yield curve signalling in the most recent liquid paper that could revive market sentiments across different segments. In effect, the signalling should be from liquid papers to illiquid papers, which could reduce the term premium and not the other way around, as is being currently done." The research report does not necessarily reflect the views of SBI or its subsidiaries.

 

The RBI has announced OMO purchases of gilts worth INR 6.6 trillion in FY26, accompanying a 125-basis-point repo rate cut between February and December to 5.25%. The net liquidity injection, factoring in currency leakage, cash reserve ratio injection and the dollar-rupee buy-sell swap auctions the central bank has conducted, is INR 5.5 trillion, according to the report. Despite this, the yield on the five-year gilt yield is down less than 5 bps since Mar. 31, while the 10-year benchmark gilt yield is higher by around 13 bps.

 

This has led to sticky yields on corporate bonds, driving companies to tap bank credit as the rate cuts have transmitted more quickly there. The spread of the weighted average lending rate over AAA-rated 10-year corporate bonds has narrowed 50 bps between April and November to 150 bps, with similar paper for non-banking financial companies having a spread of 127 bps in November, down nearly 60 bps since May. However, lending rates are not correctly pricing in risk premia over a bank's core funding costs, SBI Research said, citing market sources.

 

Money market rates have been on the uptick since August and rose in December over November despite the 25-bp rate cut during the month, SBI Research said. The average borrowing costs for states were 7.16% in Apr-Dec, only 7 bps lower on year, a sign of the asymmetric transmission of the central bank's actions, it said. The RBI is the debt manager to both the Centre and states and needs to manage borrowing costs and yields, SBI Research said. The yield curve has also been classified as a public good by the RBI in the past, the report said, recalling comments made by former RBI governor Shaktikanta Das in 2021.

 

"Historically high OMO support by the regulator, while having a much-needed liquidity support when credit growth is eclipsing deposit mobilisation by banks, needs to have a sobering effect on yields management dynamics given the elevated costs of borrowing with elevated risk premiums on account of hardening of yields," the report said.  End

 

Reported by Aaryan Khanna

Edited by Saji George Titus 

 

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