Bond markets expect OMO purchase announcement in RBI's Dec monetary policy

Reserve Bank of India

As the defence of the Indian rupee intensifies through sustained intervention by the Reserve Bank of India (RBI), liquidity conditions in the domestic banking system have come under strain. With dollar sales tightening rupee liquidity, the bond market is increasingly pricing in the possibility of an Open Market Operation (OMO) purchase of government securities in the December monetary policy review to ease system-level liquidity stress.

If announced in the December monetary policy, the OMO purchase will provide durable liquidity to the banking system leading to easing bond yields and short-term, money market rates.

An RBI OMO is the sale or purchase of government securities by the RBI to manage rupee liquidity and bond yields.

“Looming liquidity pressures is hinting towards a possible OMO by the RBI. When we do an OMO announcement, when we have a calendar and a quantum, all of that will do have an impact on the bond rate,” said Sneha A Pandey, Fund Manager - Fixed Income, Quantum Mutual Fund.

Further, Devang Shah, Head Fixed Income at Axis Mutual Fund expect the RBI to either deliver a rate cut or provide guidance through liquidity measures such as an OMO purchase. "The expected size of the OMO purchase is in the range of Rs 1–2 trillion.”

Recent OMO purchases

The central bank has so far conducted Rs 27,280 crore worth of OMO purchases in the secondary market. According to the RBI data, the central bank conducted Rs 14,810 crore OMOP purchases between November 10 and November 13, and Rs 12,470 crore between November 4 and November 7.

This was done to support the liquidity in the banking system and rising bond yields, dealers said.

The OMO purchase operation by the RBI in the secondary market has helped the bond yield to ease by 1-2 basis points.

Further, the liquidity in the banking system also surged marginally by Rs 20,000 to Rs 25,000 crore during this period.

“From the lows seen in February 2025, both overnight and durable liquidity have staged a comeback and can still be characterised as ‘easy’, remaining flat m-m despite recent outflows and INR intervention related liquidity leaks, on account of OMO support,” BNP Paribas said in a report.

Expectation from policy

On November 21, a Moneycontrol poll of economists, treasury heads and fund managers said that the RBI’s MPC is likely to cut repo rate by 25 basis points (bps) in the upcoming monetary policy due to the comfort provided by the lowest ever Consumer Price Index (CPI) inflation in the last two months.

If the RBI goes for a rate cut in December, it will be the first after maintaining status quo in the last two policies.

The RBI has so far reduced repo rate by 100 bps from 6.5 percent to 5.5 percent between February and June. It left the rate unchanged in August and October.

The MPC meets from December 3 to 5 for another round of rate-setting deliberations.