RBI takes measured steps on liquidity amid tax outflows

Liquidity has been affected by the maturity of earlier buy-sell swaps and the RBI’s intervention in the foreign-exchange market to stabilise the rupee amid heightened geopolitical tensions in West Asia.

To meet liquidity pressure because of advance tax outflows this month, the Reserve Bank of India (RBI) has adopted a measured approach with its latest announcement of open-market operations (OMOs), worth Rs 1 trillion.

Trigger for liquidity

While the immediate trigger is seasonal tax outflows, market participants said the move reflected broader pressures on durable liquidity.

Liquidity has been affected by the maturity of earlier buy-sell swaps and the RBI’s intervention in the foreign-exchange market to stabilise the rupee amid heightened geopolitical tensions in West Asia.

Net liquidity was a surplus of Rs 3.02 trillion on Thursday, the latest data showed.

The central bank on Friday said it would conduct purchases in two tranches of Rs 50,000 crore each, a move, market participa­nts said, was intended to cus­hion the liquidity deficit, which could emerge as companies made advance tax payments and settlements on goods and services tax (GST) took place.

“The RBI’s decision comes when systemic liquidity is expected to temporarily slip into deficit due to advance tax and GST outflows.

"However, beyond these frictional pressures, durable liquidity has also been strained by the maturity of buy/sell swaps and sustained intervention in the currency market following the escalation of the West Asia crisis,” said V R C Reddy, treasury head, Karur Vysya Bank.

Forward book remained elevated

Market participants said the forward book remained elevated as the RBI had increasingly relied on forward and swap intervention rather than outright spot dollar sales to stabilise the rupee, allowing it to avoid an immediate drawdown of foreign-exchange reserves.

However, a large forward book implies sizeable future dollar obligations when these contracts mature.

That could have implications for domestic liquidity and the currency market in the months ahead.

The RBI’s outstanding net short-dollar position in the rupee forward market rose to $68.42 billion by the end of January, as against $62.35 billion by the end of December.

Short positions in less than one year fell around $3 billion, while that in longer than one-year tenures rose by around $9 billion.

Of the $68 billion net short-dollar position, $10.1 billion was in one-month contracts, $7.8 billion in one-three month tenures, the $10.1 billion position is set to mature between three months and a year, and the remaining $40 billion was in more than one-year contracts.

The data for FY26 shows the central bank has undertaken sizeable liquidity operations.

The RBI’s cumulative OMO purchases have reached a historic Rs 7.39 trillion and with nearly Rs 1 trillion of on-screen buying, durable liquidity support amounts to about Rs 8.40 trillion, equivalent to nearly 78.5 per cent of FY26 net market borrowing.

RBI carried out buybacks

The RBI has also carried out buybacks worth Rs 86,775 crore and bond switches worth Rs 1.56 trillion.

Market participants said the RBI had been active through on-screen purchases of government securities in recent sessions.

Dealers estimate the central bank over the past week bought bonds worth nearly Rs 59,000 crore, including roughly Rs 20,000 crore in a single session.

Despite these measures, yields on government bonds hardened in recent weeks.

The benchmark 10-year yield went up 45-50 basis points from its yearly lows, reflecting supply pressures, relatively subdued investment demand, and global risk factors such as rising prices of crude oil.

Dealers said yields also reacted to the RBI’s absence from the market during a trading session.

“The RBI was active in purchasing earlier in the week, but when it stayed away on Friday, yields moved up by 6-7 basis points,” said a dealer at a private bank.

RBI keen to prevent an excessive rise in yields

Market participants added that the central bank appeared keen to prevent an excessive rise in yields because it could weaken the transmission of policy easing to the broader economy. With the policy cycle seen as tilted towards rate cuts, a sharp rise in bond yields could offset the impact of lower policy rates.

“There has also been interest payment in the OIS (overnight indexed swap) market because participants fear that if the RBI stops buying, yields could move higher.

"The central bank appears to be trying to prevent yields from rising too sharply, especially when the policy cycle is tilted towards rate cuts, because a sharp rise in bond yields would weaken the transmission of lower policy rates to the broader economy,” said Anshul Chandak, head of treasury, RBL Bank.