The Reserve Bank of India's first open market operation sale of the year received robust investor interest, with market participants placing bids worth ₹66,590 crore against the notified amount of ₹50,000 crore. As reported by The Economic Times, the central bank accepted bonds at yields higher than prevailing market rates, seeking to absorb surplus liquidity from the banking system. The 8.28% GS 2032 was the most in demand, with market participants bidding the highest at ₹18,840 crore, while the five-year 6.68% GS 2031 paper garnered bids of ₹3,250 crore. The 6.79% GS 2029 three-year paper was taken at a cutoff yield of 6.70%, while it closed at 6.66%, reflecting the premium demanded from investors. This strong response precedes a ₹28,000 crore weekly bond auction scheduled Friday by the RBI. According to The Economic Times, Indian government bonds traded steady in early deals on Friday, as traders remained focused on cutoffs on fresh debt supply, for near-term directional cues. The benchmark 6.94% 2036 bond yield was at 7.0497% as of 10:30 a.m. IST, after closing at 7.0463% in the previous session.
The Reserve Bank of India achieved a historic milestone by conducting its first net open market debt sale in 9 years, withdrawing ₹50,000 crore from the banking system through bond sales. As reported by Business Standard, this represents the first of three OMO tranches planned for September to absorb surplus liquidity from the banking system. The RBI sold bonds in the 2029-2032 tenors as planned, with cutoff prices ranging from ₹102.25 to ₹105.63, broadly in line with estimates from a survey. This strategic move represents nearly 0.2% of total deposits being withdrawn from circulation, marking a substantial step in the RBI's liquidity management efforts. The central bank confirmed this represents the first net sale since November 2017, highlighting the significance of this development in India's monetary policy framework. According to The Economic Times, sentiment has turned fragile in part due to the Reserve Bank of India announcing open market debt sales worth ₹1 trillion for September.
The RBI's latest OMO sale saw comprehensive acceptance across multiple government securities, with total bids worth ₹66,590 crore against the ₹50,000 crore notified amount. As reported by Business Standard, the central bank accepted ₹18,840 crore of the 8.28% GS 2032 at a cut-off yield of 7.0090%, representing the largest acceptance. Other significant acceptances included ₹12,645 crore of the 5.77% GS 2030 at 6.8589%, ₹7,255 crore of the 6.79% GS 2029 at 6.7023%, ₹3,250 crore of the 6.68% GS 2031 at 6.9080%, and ₹1,005 crore of the 7.61% GS 2030 at 6.8191%. The 7.59% government securities maturing in 2029 were accepted for ₹7,005 crore at a cut-off yield of 6.6007%. Market participants said demand was robust despite the cut-off price being higher than expected, with some banks preferring to buy bonds at current levels over parking funds through variable rate reverse repo auctions.
The RBI successfully conducted a variable rate reverse repo auction on Friday, absorbing ₹2.23 lakh crore from the banking system at a weighted average rate of 5.24%. As reported by Business Standard, the central bank received bids worth ₹2,22,629 crore, which it accepted fully for the notified amount of ₹2.25 lakh crore. This operation represents the third VRRR auction conducted since last month as part of the RBI's comprehensive liquidity management strategy. The banking system was experiencing surplus liquidity due to heavy mobilisation of foreign currency non-resident (FCNR) deposits and subsequent swaps with the RBI, along with month-end government expenditure including payments toward salaries and pensions. According to Business Standard, as of September 17, liquidity in the banking system is estimated to be in surplus of around ₹6.94 lakh crore. The RBI is conducting these operations to absorb excess liquidity and align the overnight money market rates to the repo rate.
The RBI's liquidity management strategy now encompasses both VRRR auctions and OMO bond sales, providing a dual approach to absorb excess liquidity. As reported by Business Standard, the ₹50,000 crore sale represents the first tranche of the ₹1 trillion ($10.5 billion) liquidity mop-up announced by the central bank on September 11. The remaining two operations are scheduled for September 21 and September 28. According to The Economic Times, the RBI is set to sell ₹250 billion of bonds on Monday and a similar quantum on September 28. According to The Economic Times, this combination of VRRR auctions and OMO sales represents the most comprehensive liquidity management effort in recent years, with the central bank demonstrating flexibility in its approach to address the banking system's surplus liquidity through multiple instruments. Market participants said demand at the next two OMO sales will depend on the levels at which government bond yields trade on those days, indicating continued market sensitivity to liquidity management operations.
According to Business Standard, the RBI plans to conduct OMO sale auctions worth ₹1 trillion in three tranches in September to absorb surplus liquidity from the banking system, turning to a fresh instrument after its long-term variable rate reverse repo (VRRR) auctions failed to draw adequate demand. The central bank is expected to conduct more OMO sales in October too to absorb durable liquidity, as reported by Business Standard. According to CNBC TV18, traders widely expect a 25-basis-point hike at the RBI's October policy meeting, with policymakers likely seeking to strengthen transmission of expected rate hikes. Alok Sharma, head of treasury at ICBC, stated that the RBI will likely draw down surplus liquidity through one more tranche of OMO sales or a CRR hike ahead of the October policy review. Krishna Bhimavarapu, APAC economist at State Street Investment Management, expects the RBI to withdraw around 2 trillion rupees through bond sales, alongside the start of the rate-hike cycle in October. By draining excess liquidity, the central bank aims to align the WACR with the policy repo rate of 5.25%.
