The Reserve Bank of India has announced a ₹1 lakh crore ($10.5 billion) bond sale starting September 16 to address India's largest-ever cash surplus in banking history. According to The Financial Express, this marks the first net bond sale in two years by the central bank. The RBI will sell bonds maturing from fiscal 2029 to fiscal 2032 worth ₹500 billion in the first tranche on September 17, followed by ₹250 billion each on September 21 and September 28. This strategic move comes after earlier liquidity absorption measures faced disappointing reception from banks. Governor Sanjay Malhotra confirmed that all liquidity management tools remain on the table, including open market operations and FX swaps, stating "nothing is off the table" in managing the surplus.
Indian government bond yields surged to their highest level since May 21, 2026, with the benchmark 10-year yield reaching an intraday high of 7.097% before settling at 7.073%, according to The Hindu BusinessLine. The latest spike follows the RBI's announcement of ₹1 lakh crore in open market operation (OMO) sales, adding to supply pressures in a market already grappling with sizeable issuances of government securities and State development loans (SDLs). As per IDFC First Bank's Chief Economist Gaura Sengupta, the rise reflects RBI's OMO sales announcement and additional supply pressure from G-Sec and SDLs expected to exceed market demand. The sell-off was particularly sharp at the shorter end of the curve, with the five-year bond yield surging 21 basis points, its steepest single-day rise since May 2022.
The Reserve Bank of India successfully absorbed ₹3.93 trillion through variable rate reverse repo (VRRR) auctions on Tuesday, receiving bids worth ₹3,93,352 crore for a notified amount of ₹5 trillion. The central bank accepted all bids at a cut-off and weighted average rate of 5.24%, according to the latest RBI release. Over the last month, the RBI has been conducting VRRR auctions to absorb excess surplus liquidity from the banking system and align overnight money market rates to the repo rate. The liquidity surplus in the banking system was estimated to be around ₹10.73 trillion on September 11, following the RBI's special foreign-currency deposit mobilisation measures. The banking system was flushed with liquidity due to heavy mobilisation of FCNR (B) deposits by banks, bringing in foreign currency into the system, while subsequent swaps with the RBI provided rupee liquidity to banks.
The rupee weakened significantly amid geopolitical tensions and elevated inflation concerns, declining past the 96-per-dollar mark during intraday trade before recovering to close at 95.95 against the US dollar, down 40 paise from its previous close of 95.55, as reported by The Hindu BusinessLine. The currency has declined 1.2% over the past five sessions and is expected to remain under pressure as geopolitical tensions and elevated crude prices keep investors cautious. Brent crude prices hovering around $105-107 a barrel have heightened concerns over imported inflation. Dilip Parmer, research analyst at HDFC Securities, expects the rupee to remain under pressure if crude prices stay elevated and could weaken towards 96.30. The crude oil crisis has intensified, raising concerns about supply disruptions, while global bond yields have risen amid expectations of higher interest rates.
The weakness in bond markets coincided with broader risk-off sentiment across financial assets, with the Sensex falling 777.94 points, or 1.04% to 74,003.82, and the Nifty declining 279.50 points, or 1.19% to 23,118.60, according to The Hindu BusinessLine. Market participants said concerns are now shifting beyond supply pressures to the possibility of a prolonged higher-for-longer interest-rate cycle. Some research houses have flagged the risk of a 25-basis-point repo rate hike at the RBI's October policy review. Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincap LLP, noted that global bond yields remain elevated while higher domestic inflation and surplus liquidity have prompted the RBI to step up liquidity absorption. Looking ahead, traders are closely watching the 7.10-7.15% zone as the next resistance level for the benchmark bond yield, with Srinivasan stating that bond yields are likely to remain elevated unless crude prices retreat and pressure on the rupee eases.
