Indian government bonds declined as the Reserve Bank of India (RBI) confirmed plans to sell 1 trillion rupees ($10.5 billion) in government bonds through open market operations (OMOs) over the next two weeks. This move is designed to absorb surplus cash from the banking system, which has reached a record high of approximately 11 trillion rupees. The sale will be conducted in three tranches: 500 billion rupees on September 17, and 250 billion rupees each on September 21 and September 28. This action follows a surge in banking system liquidity, fueled in part by a $127 billion foreign currency deposit scheme, pushing short-term interest rates below the RBI's policy repo rate.
The announcement intensified concerns among traders who were already bracing for the RBI to take more aggressive measures to manage liquidity. The benchmark 10-year government bond yield rose to 7.035% on September 11, its highest in over three months, indicating increased selling pressure. Traders had been building bearish bets on short-term Indian bonds, with overnight short positions in the five-year benchmark bond doubling to over 100 billion rupees ($1 billion) at the start of September compared to early August. The additional supply of government securities from the RBI's holdings is expected to further influence bond yields.
This domestic development is occurring against a backdrop of a global bond selloff, with rising yields in major economies like the US (where the 10-year Treasury yield recently approached 5%) and elevated oil prices. These international factors have already been putting pressure on Indian government securities. The RBI's decision to conduct outright bond sales, its first since September 2024 for secondary market sales, underscores its commitment to aligning short-term rates with its monetary policy framework and managing inflation risks posed by the substantial liquidity surplus. The impact on individual banks will vary based on their treasury portfolios, particularly the duration and accounting classification of their government security holdings.
