RBI Engages in OMOs to Absorb Significant Portion of FY26 Government Borrowing and Enhance Liquidity
The Reserve Bank of India (RBI) has made significant moves to bolster liquidity in the banking system by purchasing government securities that account for 47% of the Centre’s total bond issuances for the fiscal year 2026. Between April 4, 2025, and February 13, 2026, the Centre raised ₹13.65 lakh crore through government securities, while the RBI injected ₹6.39 lakh crore into the system via Open Market Operations (OMO). This strategy aims to cushion the impact of heavy government borrowing and maintain stability in the financial markets.
Cushioning Liquidity Amid Heavy Borrowing
The RBI’s extensive OMO purchases come at a crucial time when government borrowing has been substantial, typically draining liquidity from the banking sector and exerting upward pressure on bond yields. By acquiring bonds from the secondary market, the central bank has effectively infused liquidity, which has helped maintain orderly market conditions. Experts have noted that these actions have mitigated potential liquidity tightness in the banking system, preventing excessive increases in yields despite the high volume of government securities being issued. Brijesh Shah, a senior vice president at Bandhan AMC, emphasized that the RBI’s OMO purchases are vital for ensuring adequate liquidity, especially during periods of capital outflows and pressures on the Indian Rupee. He also mentioned that recent developments, such as the India-US trade deal, could lead to improved capital flows, potentially reducing the need for further OMO interventions.
Liquidity Swings and Market Conditions
Throughout much of FY26, liquidity in the banking system has remained in surplus, with only a few instances of slipping into deficit. The RBI intensified its OMO operations starting in December 2025, coinciding with a tightening of liquidity conditions. This infusion of funds has played a crucial role in keeping money market rates stable, with overnight rates closely aligning with the repo rate. Since January 2025, bond yields have experienced volatility due to various factors, including geopolitical tensions that have driven up crude oil prices and expectations surrounding the conclusion of the rate cut cycle. The Union Budget’s announcement of higher-than-expected gross borrowing figures for FY27 has also contributed to this volatility, with the 10-year benchmark government bond yield fluctuating between 6.30% and 6.70% during this period.
FY27 Borrowing Plan and Yield Impact
Looking ahead, the government has outlined a borrowing plan of ₹17.2 lakh crore for FY27, which exceeds market expectations of ₹16.5 to ₹17 lakh crore. This announcement has resulted in a notable increase in government bond yields. However, the net borrowing figure is estimated at ₹11.73 lakh crore, slightly higher than the previous estimate of ₹11.53 lakh crore, reflecting an increase of ₹20,000 crore. Additionally, RBI data indicates that government securities worth ₹5.47 lakh crore are set to mature. The dynamics of government borrowing play a critical role in shaping interest rates within the economy. An increase in bond supply typically raises yields unless there is robust demand from banks, insurance companies, and foreign investors to absorb the additional securities.
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