OMO bond sales explained: Why RBI wants to pull ₹1 trn out of the system

The Reserve Bank of India (RBI) has announced its first large-scale net open market sale of government securities in two years, putting ₹1 trillion of bonds on the block in three tranches. The move comes as the banking system sits on a very large liquidity surplus following the record response to the RBI’s special foreign-currency deposit mobilisation measures. The resulting rupee liquidity has pushed short-term money-market rates below the policy repo rate, complicating the RBI’s effort to keep financial conditions aligned with its monetary-policy stance.

The auctions of Government of India securities are scheduled for September 17, 21 and 28, with ₹50,000 crore offered in the first and ₹25,000 crore in each of the next two, a September 11 RBI press note said.

The auctions will use a multi-security, multiple-price method. The first auction comprises six government securities maturing between 2029 and 2032.

Why is there so much surplus liquidity in the first place?

The banking system has accumulated a very large liquidity surplus following the RBI’s USD-INR swap facility. The measures mobilised $136.38 billion by August 31, including $127.23 billion through Foreign Currency Non-Resident (Bank) or FCNR (B) deposits. Banks received rupees when the foreign currency was swapped with the RBI, creating a substantial liquidity injection into the domestic financial system. By September 9, the surplus had risen to about ₹10.5 trillion, while overnight money-market rates fell below the RBI’s policy rate.

If the RBI does not want that additional rupee liquidity to remain in the system, it can subsequently absorb the rupees through instruments such as reverse repos, Variable Rate Reverse Repo (VRRR) auctions, Open Market Operation (OMO) bond sales or other liquidity-management tools.

Why can’t the RBI simply leave the money in the system?

When banks have more cash than they need, they have less reason to borrow from one another and may lend or park funds at lower rates, and the transmission of monetary policy becomes distorted. On September 4, the weighted average call rate was 4.93 per cent, about 32 basis points below the 5.25 per cent repo rate. The RBI’s objective is to keep short-term market rates aligned with its policy stance.

This matters because the RBI uses the repo rate to influence borrowing costs across the economy. Its liquidity-management framework is designed to keep the weighted average call rate aligned with the policy rate, helping monetary-policy changes transmit to other interest rates. Excess liquidity can weaken that link.

Why OMO bond sales instead of other tools?

An open market operation, or OMO, is a purchase or sale of government securities by the central bank. When the RBI buys bonds, it injects liquidity. When it sells them, buyers pay the RBI, reducing rupee liquidity in the banking system.

The RBI has several other ways of absorbing liquidity, including:

VRRR/reverse repos: absorb liquidity for a specified period, but the money eventually comes back into the system.
Cash Reserve Ratio (CRR): requires banks to keep a larger share of deposits with the RBI, directly reducing lendable resources.
Forex swaps: can absorb or inject rupees while simultaneously affecting the RBI’s foreign-exchange position.
Market Stabilisation Scheme (MSS): government securities can be issued specifically to absorb excess liquidity.

The RBI has already used VRRR auctions aggressively, including absorbing more than ₹6 trillion through two such operations in early September. But the liquidity surplus has remained very large.

OMO sales offer the RBI a way of taking durable liquidity out of the system rather than repeatedly conducting short-term operations. However, selling government bonds can push bond prices down and yields up.

The bond-market angle: Who pays the price?

When the RBI sells G-Secs, more bonds enter the market, the bond supply rises and prices can fall, but the yields rise. The market reaction was already visible after the announcement, with the benchmark 10-year government bond yield rising to around 7.035 per cent, up 6 bps on the day, while its 5-year counterpart rose as much as 10 bps to 6.6222 per cent, according to a report by Moneycontrol.

What does this mean for banks and borrowers?

For banks, less surplus cash means less excess liquidity available for deployment. But an OMO sale does not change the repo rate, which remains at 5.25 per cent. Its effect on lending rates will depend on banks’ funding costs, deposit competition and broader market rates.

Companies, particularly highly rated borrowers, could see some moderation in the easy funding conditions created by the liquidity surplus. SBI Chairman CS Setty has said banks may take three to four months to deploy the FCNR(B)-related liquidity.

The RBI announcement says that eligible participants have to submit bids electronically through its E-Kuber system between 9:30 am and 10:30 am, with successful participants required to have the securities available in their SGL accounts for settlement. The relevant pool is essentially the institutional participants that are authorised to transact in government securities with the Central Bank, such as scheduled commercial banks, primary dealers, other financial institutions/investors that are permitted to participate in the government securities market, subject to RBI rules. Retail investors are not directly bidding in this OMO auction.

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