RBI to Conduct Rs 25,000 Crore OMO Bond Sale on September 28 to Drain Excess Banking Liquidity

The Reserve Bank of India (RBI) will conduct an Open Market Operation (OMO) sale auction of Government of India securities worth Rs 25,000 crore on September 28. The upcoming auction forms the third and final leg of the central bank’s planned Rs 1,00,000 crore OMO sale program announced earlier this month to drain durable liquidity from the banking system.

The auction will feature a basket of sovereign securities maturing between 2029 and 2032. Under OMO sales, commercial banks and institutional participants purchase government securities from the RBI, effectively withdrawing rupee liquidity from the banking channels.

Final Tranche of Rs 1 Lakh Crore Package

The RBI initially announced the multi-stage OMO sale on September 11 after observing a sharp buildup in banking system cash balances. The program has progressed in three scheduled phases:

• Tranche 1 (September 17): The central bank kicked off the absorption drive by offloading Rs 50,000 crore worth of government securities.
• Tranche 2 (September 21): The RBI accepted bids worth Rs 25,000 crore across five government securities, despite receiving aggressive bids totaling Rs 84,982 crore—more than three times the notified amount.
• Tranche 3 (September 28): The final tranche will complete the planned Rs 1,00,000 crore absorption target.

In the September 21 auction, the central bank accepted Rs 11,512 crore of the 6.10% GS 2031, Rs 8,758 crore of the 7.95% GS 2032, Rs 2,300 crore of the 6.75% GS 2029, Rs 2,250 crore of the 7.17% GS 2030, and Rs 180 crore of the 7.17% GS 2028. All bids for the 8.28% GS 2027 were rejected, underscoring the central bank's selective approach to pricing.

Drivers Behind the Liquidity Surge

Banking system liquidity expanded significantly in recent weeks, with surplus cash balances touching around Rs 6.05 lakh crore on September 20.

Key factors contributing to the liquidity glut:

• Foreign Currency Mobilisation: Heavy inflows under the RBI's special USD-INR swap facility reached $143.60 billion as of September 18, with Foreign Currency Non-Resident (Bank) deposits accounting for $132.98 billion. As commercial banks swapped these foreign currency inflows with the central bank, substantial rupee liquidity was injected into domestic accounts.
• Government Expenditure: Stepped-up month-end government spending on pensions, salaries, and infrastructure development contributed further to cash balances held by commercial lenders.
• Rate Divergence: The deluge of cash pushed the weighted average call money rate (WACR) below the policy repo rate, prompting the monetary authority to deploy open market operations alongside variable rate reverse repo (VRRR) auctions to anchor short-term rates.

Implications for Bond Yields and Investors

The ongoing bond sales represent an active effort to sterilise foreign inflows without triggering abrupt liquidity shocks. For fixed-income markets, the persistent supply of secondary paper by the central bank has introduced mild upward pressure on sovereign yields, particularly in the 5- to 10-year segment.

However, robust subscription numbers from primary dealers, mutual funds, and banks in earlier tranches show strong underlying institutional appetite for dated government securities. The completion of the final Rs 25,000 crore tranche on September 28 is expected to restore equilibrium between interbank money market rates and the RBI's policy corridor ahead of the next Monetary Policy Committee review.

Tags: RBI Government Securities Indian Banking Sector Debt Market Money Market