Synopsis: The Reserve Bank of India is expected to inject Rs. 5 lakh crore in FY27 via liquidity tools like OMOs to manage a Rs. 40 lakh crore borrowing pipeline, stabilise bond yields, and maintain surplus liquidity amid a pause in rate cuts.
India’s financial system is preparing for a year of heavy borrowing and tight liquidity conditions. With the government, states, and corporates expected to raise large amounts of funds from the bond market, concerns are emerging about rising yields and higher borrowing costs.
In this backdrop, the Reserve Bank of India (RBI) is likely to play a crucial role by actively managing liquidity in the banking system. Rather than relying on further interest rate cuts, the central bank is expected to use tools such as Open Market Operations (OMOs) and other market mechanisms to ensure adequate liquidity, stabilise bond markets, and support economic growth in the upcoming fiscal year.
Rs. 5 Lakh Crore Liquidity Infusion Expected
According to economists, at least Rs. 5 lakh crore of liquidity will be injected by the Reserve Bank of India (RBI) through various measures during the next financial year. This infusion is expected to help manage tightening demand and supply conditions in the money markets, driven by high demand for credit and a corresponding increase in government borrowing.
If there is insufficient liquidity available in the short-term money markets, short-term interest rates should rise, which would further negatively impact overall economic conditions.
To inject sufficient liquidity into the banking system, the RBI will most likely use Open Market Operations (OMOs), reverse repo agreements (at different interest rates), and other types of market-based mechanisms.
Rs. 40 Lakh Crore Borrowing Pipeline Raises Yield Concerns
The total borrowing pipeline (include gross borrowing estimates of the central government, all states, and corporate entities) is estimated to be approximately Rs. 40 lakh crore. As such, the large number of bonds expected to enter the market is expected to exert upward pressure on bond yields.
Higher yields for bonds will increase borrowing costs for both the government and private sector and could therefore negatively impact future levels of investment and infrastructure spending. As a result, market participants are currently monitoring liquidity availability and actions by the RBI to assess the amount of debt supplied and absorbed by the banking system.
OMO Purchases to Remain the Primary Tool
The RBI has demonstrated its commitment to stabilising the bond market by engaging in OMO purchases to add liquidity to the system. The central bank has bought Rs 6.88 lakh crore of government securities through OMOs from the secondary market in FY26, which shows how dedicated it is to adding liquidity to the bond market.
Through the purchase of bonds from the secondary market, the RBI injects long-term liquidity into the banking sector. In addition, by supporting past bond prices and controlling large swings in yields, the RBI assists in stabilising the bond market. Given the current environment of expedited government borrowing and changing global financial conditions, this strategy is crucial.
Shift from Rate Cuts to Liquidity Management
The latest MPC minutes point to a pause on further repo rate cuts, which means policy rates are likely to be stable over the near future. Therefore, the RBI will shift its focus from rate changes to liquidity management to effectively achieve monetary policy objectives.
By effectively managing liquidity, the RBI can influence short-term money market interest rates and achieve effective transmission of past monetary policy actions without changing the benchmark interest rate.
Targeting Surplus Liquidity
According to experts, the RBI is likely to continue ensuring that there is more than 1% of Net Demand and Time Liabilities (NDTL) of systemic liquidity in surplus. Having a systemic liquidity surplus of 1% NDTL or higher would facilitate smoother operation of the bond market, reduce overnight rate volatility and allow for orderly absorption of the financing for the large government borrowing programme. As a result, while policy rates may not change, proactive liquidity management will help stabilise financial markets and keep financing costs under control for the upcoming fiscal year.
Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on tradebrains.in are their own, and not that of the website or its management. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution while investing or trading in stocks. Trade Brains Technologies Private Limited or the author are not liable for any losses caused as a result of the decision based on this article. Please consult your investment advisor before investing.
The post RBI to Pump ₹5 Lakh Cr Liquidity to Steady Bond Markets Amid Heavy FY27 Borrowing appeared first on Trade Brains.